Cryptocrashes

Abstract

This paper proposes a new nonparametric test for detecting short-lived locally explosive trends (drift bursts) in pure-jump processes. The new test is designed specifically to detect intraday flash crashes and gradual jumps in cryptocurrency prices recorded at a high frequency. Empirical analysis shows that drift bursts in bitcoin price occur, on average, every second day. Their economic importance is highlighted by showing that hedge funds holding cryptocurrency in their portfolios are exposed to a risk factor associated with the intensity of bitcoin crashes. On average, hedge funds do not profit from intraday bitcoin crashes and do not hedge against the associated risk.

Keywords: drift burst, pure-jump, cryptocurrency, bitcoin, hedge funds, flash crash

JEL Classification: C01, C58, G00