The impacts of futures trading on volatility and volatility asymmetry of Bitcoin returns

• Published in: International review of financial analysis Vol. 86; p. 102497
• Main Authors: Zhang, Chuanhai, Ma, Huan, Arkorful, Gideon Bruce, Peng, Zhe
• Format: Journal Article
• Language: English
• Published: Elsevier Inc 01.03.2023
• Subjects: Asymmetry; Bitcoin; Futures-trading activity; GARCH models; Volatility; GARCH models; C32; Asymmetry; Volatility; C12; Bitcoin; C14; G14; Futures-trading activity
• ISSN: 1057-5219; 1873-8079
• DOI: 10.1016/j.irfa.2023.102497

The impact of Bitcoin futures introduction on the underlying Bitcoin volatility has been a controversial topic. Conflicting results had been obtained from different sample periods and methodologies. To address this debate, this study examines the impact of futures trading on volatility and volatility asymmetry of Bitcoin returns in the short and long run. Using exponential GARCH models, we introduce a dummy in the variance equation to capture the changes in the volatility after the introduction of Bitcoin futures. We find that after the introduction, spot return volatility decreases in the short run, but increases in the long run. Besides, in the short run, there exists an inverse leverage effect before and after the introduction; in the long run, the inverse leverage effect before the introduction changes to a usual level effect after the introduction. Finally, we examine whether greater futures trading activity, proxied by trading volume and open interest, is associated with greater Bitcoin volatility. To do so, we decompose each proxy into expected and unexpected components and document that, in the long run, Bitcoin volatility covaries positively with unexpected futures trading volume, but negatively with unexpected futures open interest. •We investigate the impact of futures trading on volatility and volatility asymmetry of Bitcoin returns.•After the Bitcoin futures introduction, the spot market volatility decreases in the short run but increases in the long run.•In the short run, an inverse leverage effect exists both before and after the introduction; in the long run, this effect becomes a usual leverage effect after the introduction.•In the long run, Bitcoin volatility covaries positively with unexpected futures trading volume, but negatively with unexpected futures open interest.