Good Volatility, Bad Volatility, and the Cross Section of Cryptocurrency Returns
42 Pages Posted: 1 Sep 2021 Last revised: 2 Sep 2021
Date Written: August 29, 2021
This paper examines the distributional properties of cryptocurrency realized variation measures (RVM) and the predictability of RVM on future returns. We show the cryptocurrency volatility persistence and the importance of the asymmetry on volatility forecasting. Signed jumps variations contribute around 18% of the cryptocurrency return quadratic variations. The realized signed jump (RSJ) strongly predicts the cross-sectional future excess returns. Sorting the cryptocurrencies into portfolios sorted by RSJ yields statistically and economically significant differences in future excess returns. This jump risk premium remains significant after controlling for cryptocurrency market characteristics and existing risk factors. The standard cross-sectional regression convinces the cryptocurrency return predictability from RSJ by controlling multiple cryptocurrency characteristics. The investor attention explains the predictability of realized jump risk in future cryptocurrency returns.
Keywords: Cryptocurrency, realized jump, return predictability, realized volatility
JEL Classification: G11, G12, G17, G41
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