VCRIX - A Volatility Index for Crypto-Currencies

Abstract

Public interest, explosive returns, and diversification opportunities gave stimulus to the adoption of traditional financial tools to crypto-currencies.While the CRIX index offered the first scientifically-backed proxy to the cryptomarket (analogous to S&P 500), the introduction of Bitcoin futures by Cboe became the milestone in the creation of the derivatives market for cryptocurrencies. Following the intuition of the "fear index" VIX for the American stock market, the VCRIX volatility index was created to capture the investor expectations about the crypto-currency ecosystem. VCRIX is built based on CRIX and offers a forecast for the mean annualized volatility of the next 30 days, re-estimated daily. The model was back-tested for its forecasting power, resulting in low MSE performance and further examined by the simulation of VIX (resulting in a correlation of 78% between the actual VIX and VIX * Financial support from NUS FRC grant R-155-000-199-114 "Augmented machine learning and network analysis with applications to cryptocurrencies and blockchains" and IRTG 1792 "High Dimensional Non Stationary Time Series", Humboldt-Universität zu Berlin is gratefully acknowledged.† kolesnal [at]hu-berlin.de ‡ simon.trimborn[at]nus.edu.sg § haerdle[at]hu-berlin.de 1 estimated with the VCRIX model). VCRIX provides forecasting functionality and serves as a proxy for the investors' expectations in the absence of the developed derivatives market. These features provide enhanced decision making capacities for market monitoring, trading strategies, and potentially option pricing.

Understanding Cryptocurrencies*

“…Cryptocurrencies, as a new type of asset, offer many research opportunities for financial econometrics. For example, research on the dynamics of cryptocurrency trading, pricing, and volatility forecasting is advancing at a rapid pace (Briere et al, 2013;Gronwald, 2014;Cheung et al, 2015;Fry and Cheah, 2016;Chan et al, 2017;Kim et al, 2019). We will focus on the areas of network design, sentiment, and valuation; monetary systems and financial development; institutions; adoption, price discovery and high-frequency data; index construction; portfolio diversification; bubbles; alternative methods to raise capital; and the role of energy in consensus mechanisms.…”

“…Cryptocurrencies are traded 24/7 on hundreds of venues, like WorldCoinIndex (worldcoinindex.com), CoinMarketCap, CryptoCompare, CryptoCurrencyIndex30 (cci30.com), or the CME CF Cryptocurrency Indices (cmegroup.com/trading/cryptocurrency-indices.html). Preliminary research on index construction is made, for example, by Trimborn and Härdle (2018), Chen et al (2018a) and Kim et al (2019).…”

“…The difficulty in establishing a price and the possibility of price manipulation on certain exchanges has lead the SEC to block the creation of cryptocurrency ETFs. Kim et al (2019) have set the goal of capturing the expectations on the cryptocurrency market (represented by CRIX) through the construction of an implied volatility proxy in absence of the derivatives for the majority of cryptocurrencies. The "fear index" VIX of the United States stock market was selected as a guidance.…”

“…Cryptocurrencies have, in contrast to many markets, a plethora of available and free data, ripe for empirical investigation. We are just now seeing the genesis of academic research focusing on this emerging technology (Harvey, 2014(Harvey, , 2017a(Harvey, , 2017bKim et al, 2019).…”

OUP accepted manuscript

“…To fulfill a hedge or speculation need from institutional investors, we replicate the entire analysis for the CRyptocurrency IndeX (CRIX), a market portfolio comprising leading cryptocurrencies (see more detail in www.thecrix.de). A recent volatility index, VCRIX, created by Kim et al (2019) also shows the evidence of jumps in CRIX.…”