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Futures trading activity and the jump risk of spot market: Evidence from the bitcoin market

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  • Zhang, Chuanhai
  • Ma, Huan
  • Liao, Xiaosai

Abstract

This paper examines the impacts of Bitcoin futures trading on the jump risk of spot market. Based on 5-min high-frequency data, we use a nonparametric method to detect Lévy-type jumps in Bitcoin and document that Bitcoin prices are subject to both big and small jumps, and the jump risk – captured by jump intensity and jump size– is time varying. We then investigate the changes of the jump risk before and after the Bitcoin futures introduction and find that both the jump intensity and jump size of big and small jumps have decreased, yet the change of the latter is insignificant. Furthermore, we examine whether greater futures trading activity, proxied by unexpected trading volume and open interest, is associated with greater jump risk in the spot market. We document that jump risk Granger-causes futures speculative trading activity while the reverse is not true, and there is no causality between futures hedging activity and jump risk.

Suggested Citation

  • Zhang, Chuanhai & Ma, Huan & Liao, Xiaosai, 2023. "Futures trading activity and the jump risk of spot market: Evidence from the bitcoin market," Pacific-Basin Finance Journal, Elsevier, vol. 78(C).
    • Handle: RePEc:eee:pacfin:v:78:y:2023:i:c:s0927538x23000161
    DOI: 10.1016/j.pacfin.2023.101950
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    More about this item

    Keywords

    Cryptocurrency; Bitcoin futures; Lévy jumps; Futures trading activity; High-frequency data;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models

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