Futures-Trading Activity and Jump Risk: Evidence From the Bitcoin Market

Abstract

This paper examines the effects of futures trading on jump risk in the Bitcoin market. Based on 5-minute high-frequency data, we use a nonparametric method to detect Lévy-type jumps in Bitcoin prices and document that there are both big and small jumps, and the intensity and size of jump are time-varying. We then investigate the changes of these jump risk measures after the Bitcoin futures introduction and find that the jump size of big and small jumps decreases while the big jump intensity increases. Furthermore, we examine whether greater futures-trading activity, proxied by trading volume and open interest, is associated with greater spot market jump risk. It is found that there exists a bidirectional causality between unexpected futures-trading volume and spot market jump risk. Unexpected open interest Granger causes jump risk, but the reverse is not true.