What is the expected return on Bitcoin? Extracting the term structure of returns from options prices

Foley, Sean; Li, Simeng; Malloch, Hamish; Švec, Jiří

doi:10.1016/j.econlet.2021.110196

Cited by 6 publications

(8 citation statements)

References 20 publications

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“…Market stress increased belief dispersion, decreasing Bitcoin futures returns but significantly elevating volatility and trading volume in the pandemic phase compared to the pre-pandemic period (Park 2022 ). In contrast to the S&P 500 Index and gold, which usually alternated between 3 and 5%, Foley et al ( 2022 ) found that the expected risk premium for Bitcoin is considerably higher than other markets, averaging around 80% yearly. Foroutan and Lahmiri ( 2022 ) reinforced that cryptocurrencies are more erratic and unstable than global stock markets during the COVID-19 pandemic.…”

Section: Prior Literaturementioning

confidence: 98%

Exploring the asymmetric effect of COVID-19 pandemic news on the cryptocurrency market: evidence from nonlinear autoregressive distributed lag approach and frequency domain causality

Gherghina

Simionescu

2023

Financ Innov

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This paper explores the asymmetric effect of COVID-19 pandemic news, as measured by the coronavirus indices (Panic, Hype, Fake News, Sentiment, Infodemic, and Media Coverage), on the cryptocurrency market. Using daily data from January 2020 to September 2021 and the exponential generalized autoregressive conditional heteroskedasticity model, the results revealed that both adverse and optimistic news had the same effect on Bitcoin returns, indicating fear of missing out behavior does not prevail. Furthermore, when the nonlinear autoregressive distributed lag model is estimated, both positive and negative shocks in pandemic indices promote Bitcoin’s daily changes; thus, Bitcoin is resistant to the SARS-CoV-2 pandemic crisis and may serve as a hedge during market turmoil. The analysis of frequency domain causality supports a unidirectional causality running from the Coronavirus Fake News Index and Sentiment Index to Bitcoin returns, whereas daily fluctuations in the Bitcoin price Granger affect the Coronavirus Panic Index and the Hype Index. These findings may have significant policy implications for investors and governments because they highlight the importance of news during turbulent times. The empirical results indicate that pandemic news could significantly influence Bitcoin’s price.

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Section: Prior Literaturementioning

confidence: 98%

Exploring the asymmetric effect of COVID-19 pandemic news on the cryptocurrency market: evidence from nonlinear autoregressive distributed lag approach and frequency domain causality

Gherghina

Simionescu

2023

Financ Innov

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“…2 In the same year, the European Securities and Markets Authority (ESMA) implemented the MiFID II tick size framework. 3 All European exchanges adopted a standardized tick size regime depending on both liquidity and price level to create a "level playing field" between trading venues and to prevent tick sizes from being used as a tool for competition (Foley et al (2022)).…”

Section: Cryptocurrency Traded Value By Exchangementioning

confidence: 99%

“…Equity exchanges have progressively decreased their tick sizes due to the historic shift to decimalization, reducing binding tick sizes and resulting in reduced trading costs (Christie and Schultz (1994)). More recently, equity market fragmentation has dispersed trading across multiple markets and forced exchanges to lower their tick sizes in response to competition from other venues (Foley et al (2022)).…”

Section: Undercutting Tick Size and Market Qualitymentioning

confidence: 99%

“…Extant literature provides evidence of enhanced market quality from tick size reductions in North America (Harris (1991(Harris ( ), (1994, Bacidore (1997), Porter and Weaver (1997), and Goldstein and Kavajecz (2000)), Europe (Bourghelle and Declerck (2004), Foley et al (2022)), and Asia (Lau and McInish (1995), Aitken and Comerton-Forde (2005), and Werner et al (2019)). Similar results are observed in futures markets (Kurov (2008)), foreign exchange markets (Mahmoodzadeh and Gencay (2017)), and U.S. Treasury markets (Fleming, Nguyen, and Ruela (2019)).…”

Section: Undercutting Tick Size and Market Qualitymentioning

confidence: 99%

“…Similar results are observed in futures markets (Kurov (2008)), foreign exchange markets (Mahmoodzadeh and Gencay (2017)), and U.S. Treasury markets (Fleming, Nguyen, and Ruela (2019)). However, most market quality improvements from tick size reductions are largely driven by stocks whose spreads are binding (Werner et al (2019), Foley et al (2022)). As the spreads of these stocks become more unconstrained, further reductions in tick sizes are unlikely to yield similar benefits.…”

Section: Undercutting Tick Size and Market Qualitymentioning

confidence: 99%

See 2 more Smart Citations

When Bigger is Better: The Impact of a Tiny Tick Size on Undercutting Behavior

Dyhrberg¹,

Foley

Švec³

2022

J. Financ. Quant. Anal.

Self Cite

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Economically insignificant tick sizes encourage undercutting behavior, thus harming market quality. Theoretical work shows that increasing tick sizes in unconstrained markets reduces undercutting and improves market quality. Equity market pricing grids are generally too coarse to test this prediction. We examine a cryptocurrency market with infinitesimal tick sizes where undercutting limit orders acquire price priority without meaningful economic cost. We show that increasing tick sizes reduces undercutting behavior, increases liquidity provision and quoted depth, and reduces transaction costs for institutional and retail-sized trades while decreasing short-term volatility. Tiny tick sizes are suboptimal, supporting increased minimum trading increments in tick-unconstrained markets.

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Periodicity in Cryptocurrency Volatility and Liquidity

Hansen¹,

Kim²,

Kimbrough³

2022

Journal of Financial Econometrics

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We study recurrent patterns in volatility and volume for major cryptocurrencies, Bitcoin and Ether, using data from two centralized exchanges (CEXs; Coinbase Pro and Binance) and a decentralized exchange (DEX; Uniswap V2). We find systematic patterns in both volatility and volume across day-of-the-week, hour-of-the-day, and within the hour. These patterns have grown stronger over the years and are presumably related to algorithmic trading and funding times in futures markets. We also document that price formation mainly takes place on the CEXs while price adjustments on the DEXs can be sluggish.

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What is the expected return on Bitcoin? Extracting the term structure of returns from options prices

Cited by 6 publications

References 20 publications

Exploring the asymmetric effect of COVID-19 pandemic news on the cryptocurrency market: evidence from nonlinear autoregressive distributed lag approach and frequency domain causality

Exploring the asymmetric effect of COVID-19 pandemic news on the cryptocurrency market: evidence from nonlinear autoregressive distributed lag approach and frequency domain causality

When Bigger is Better: The Impact of a Tiny Tick Size on Undercutting Behavior

Periodicity in Cryptocurrency Volatility and Liquidity

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