Cryptocurrency Returns before and after the Introduction of Bitcoin Futures

Abstract

This paper examines the behaviour of Bitcoin returns and those of several other cryptocurrencies in the pre and post period of the introduction of the Bitcoin futures market. We use the principal component-guided sparse regression (PC-LASSO) model to analyze several sample sizes for the pre and post periods. Besides the neighbourhood of the break time, the current period is also investigated as returns start to recover after some time. Search intensity is observed to be the most important variable for Bitcoin for all periods, whereas for the other cryptocurrencies there are other variables that seem more important in the pre period, while search intensity still stands out in the post period. Furthermore, GARCH analyses suggest that search intensity increases the volatility of Bitcoin returns more in the post period than it does in the pre period. Our empirical findings suggest that the top five cryptocurrencies are substitutes before the launch of Bitcoin futures. However, this effect is lost, and moreover, there are spillover effects on altcoins during both the post and the recovery period. We find a spillover effect of the introduction of bitcoin futures on altcoins and this effect seems to persist during the recovery period.

Forecasting the Returns of Cryptocurrency: A Model Averaging Approach

“…Lagged XRP returns, NYSE and the Mom introduced by Fama and French (1993), have positive effects on the current daily returns of the XRP. This finding coincides with Deniz and Stengos (2020), where a positive correlation between the XRP market and the NYSE index is also discovered.…”

“…In contrast, the lagged returns from S&P 500, Mom and Euro have negative effects. This finding is also consistent with Deniz and Stengos (2020). It suggests that the LTC market is contemporaneously positively correlated with the gold market, the Forex market, and the financial market's momentum while being negatively affected by the lagged information from the markets above.…”

“…In comparison, daily returns from the NYSE and the gold market have positive effects on the ETH's daily returns. This finding is supported by Deniz and Stengos (2020), who also discovered a positive correlation between the ETH market and the NYSE and the gold market.…”

“…Therefore, as the liquidity becomes cheaper, investors divest from the XRP for other assets. Deniz and Stengos (2020) also uncovered the negative relationship between the U.S. federal funds market and the XRP market. For the USDT, its lagged returns, NYSE and the Mom negatively affect the current daily returns.…”

Recent Developments in Cryptocurrency Markets: Co-Movements, Spillovers and Forecasting

“…In particular, they propose a shrinkage Mallows model averaging (SMMA) estimator for forecasting, and they find that the returns for most cryptocurrencies are sensitive to volatilities from major financial markets. Deniz and Stengos (2020), in "Cryptocurrency Returns before and after the Introduction of Bitcoin Futures", also examined the behaviour of Bitcoin returns and those of several other cryptocurrencies in the periods before and after the introduction of the Bitcoin futures market by using a principal-component-guided sparse regression (PC-LASSO) model to analyze several sample sizes for the before and after periods, and they found that the top-five cryptocurrencies were substitutes before the launch of Bitcoin futures. However, this effect was lost, and moreover, there were spillover effects on altcoins during both the after and the recovery periods.…”