The Impacts of Futures Introduction on Spot Market Volatility: Evidence from the Bitcoin Market
51 Pages Posted: 13 Aug 2021 Last revised: 23 Aug 2021
Date Written: August 12, 2021
The impact of Bitcoin futures introduction on the underlying Bitcoin volatility has been a controversial topic. Conflicting results had been obtained with different sample periods and methodologies. To address this debate, this study examines the impacts of Bitcoin futures trading on spot market volatility in the short and long run. Using exponential GARCH model, we introduce a dummy in the variance equation to capture the changes in the volatility before and after the introduction of Bitcoin futures. We find that after Bitcoin futures introduction, spot return volatility decreases in the short run, but increases in the long run. Besides, in the short run, there exists an inverse leverage effect before and after the introduction of futures; in the long run, it changes from an inverse leverage effect to a usual leverage effect. Finally, we examine whether greater futures trading activity, including volume and open interest, is associated with greater Bitcoin volatility. To do so, we decompose each proxy for trading activity into expected and unexpected components and document that Bitcoin volatility covaries positively with unexpected futures trading volume, but negatively related to forecastable futures trading volume.
Keywords: Bitcoin; Futures-trading activity; Volatility; Asymmetry; GARCH models; FinTech
JEL Classification: C12, C14, C32, G14
Suggested Citation: Suggested Citation