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Risk Premia in the Bitcoin Market

Author

Listed:
  • Caio Almeida
  • Maria Grith
  • Ratmir Miftachov
  • Zijin Wang

Abstract

Based on options and realized returns, we analyze risk premia in the Bitcoin market through the lens of the Pricing Kernel (PK). We identify that: 1) The projected PK into Bitcoin returns is W-shaped and steep in the negative returns region; 2) Negative Bitcoin returns account for 33% of the total Bitcoin index premium (BP) in contrast to 70% of S&P500 equity premium explained by negative returns. Applying a novel clustering algorithm to the collection of estimated Bitcoin risk-neutral densities, we find that risk premia vary over time as a function of two distinct market volatility regimes. In the low-volatility regime, the PK projection is steeper for negative returns. It has a more pronounced W-shape than the unconditional one, implying particularly high BP for both extreme positive and negative returns and a high Variance Risk Premium (VRP). In high-volatility states, the BP attributable to positive and negative returns is more balanced, and the VRP is lower. Overall, Bitcoin investors are more worried about variance and downside risk in low-volatility states.

Suggested Citation

  • Caio Almeida & Maria Grith & Ratmir Miftachov & Zijin Wang, 2024. "Risk Premia in the Bitcoin Market," Papers 2410.15195, arXiv.org.
    • Handle: RePEc:arx:papers:2410.15195
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    References listed on IDEAS

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    3. Bekaert, Geert & Hoerova, Marie, 2014. "The VIX, the variance premium and stock market volatility," Journal of Econometrics, Elsevier, vol. 183(2), pages 181-192.
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