On the volatility dynamics of bitcoin and traditional assets: insights from derivatives markets
File(s)
Author(s)
Matsui, Toshiko
Type
Thesis
Abstract
This thesis investigates whether bitcoin derivatives, together with the underlying spot market, behave in a similar way to those of traditional assets with respect to their volatility profile. Although bitcoin markets are younger and less regulated, they have spawned a complex derivatives ecosystem whose behaviour remains poorly understood. We focus on implied volatility (IV), extracted from option prices, and quantitatively compare the volatility-related features for bitcoin, gold and crude oil. In doing so, we provide the first cross-asset assessment of bitcoin’s evolving maturity from a volatility perspective.
Our contributions are fourfold: (i) We show that maturity, trading volume, and open interest influence bitcoin’s futures price volatility and basis in ways broadly consistent with traditional assets, although bitcoin’s trading volume impacts the basis differently than gold or oil. (ii) We demonstrate that bitcoin’s IV explains a portion of the stock market’s IV (VIX), revealing an emerging channel of volatility linkages between crypto and traditional financial systems – albeit limited compared to the IV of gold or oil. (iii) We confirm that bitcoin IV explains realised volatility (RV) in a manner similar to gold and oil, although the connection weakens in volatile markets. (iv) Finally, we develop an IV-augmented GARCH model, and use it to prove that IV (data-based information) provides information beyond GARCH-estimated volatility (model-based forecasts) when predicting RV for all examined assets. We further find that IV-augmented GARCH models, as opposed to their regression counterparts, yield the most accurate results for bitcoin, ether and oil.
The results of our analysis from an (implied) volatility perspective suggest that bitcoin derivatives generally exhibit similar traits to derivatives of traditional assets. The informational value of bitcoin’s IV indicates the increasing potential for crypto-derivatives to enhance volatility forecasting and risk management, paving the way for a more mature environment in the realm of cryptocurrency.
Our contributions are fourfold: (i) We show that maturity, trading volume, and open interest influence bitcoin’s futures price volatility and basis in ways broadly consistent with traditional assets, although bitcoin’s trading volume impacts the basis differently than gold or oil. (ii) We demonstrate that bitcoin’s IV explains a portion of the stock market’s IV (VIX), revealing an emerging channel of volatility linkages between crypto and traditional financial systems – albeit limited compared to the IV of gold or oil. (iii) We confirm that bitcoin IV explains realised volatility (RV) in a manner similar to gold and oil, although the connection weakens in volatile markets. (iv) Finally, we develop an IV-augmented GARCH model, and use it to prove that IV (data-based information) provides information beyond GARCH-estimated volatility (model-based forecasts) when predicting RV for all examined assets. We further find that IV-augmented GARCH models, as opposed to their regression counterparts, yield the most accurate results for bitcoin, ether and oil.
The results of our analysis from an (implied) volatility perspective suggest that bitcoin derivatives generally exhibit similar traits to derivatives of traditional assets. The informational value of bitcoin’s IV indicates the increasing potential for crypto-derivatives to enhance volatility forecasting and risk management, paving the way for a more mature environment in the realm of cryptocurrency.
Version
Open Access
Date Issued
2024-02-04
Date Awarded
01/12/2025
License URL
Advisor
Knottenbelt, William
Publisher Department
Department of Computing
Publisher Institution
Imperial College London
Qualification Level
Doctoral
Qualification Name
Doctor of Philosophy (PhD)