Discussion Paper

No. 2016-41 | October 04, 2016
On the Return-volatility Relationship in the Bitcoin Market Around the Price Crash of 2013


The authors examine the relation between price returns and volatility changes in the Bitcoin market using a daily database denominated in various currencies. The results for the entire period provide no evidence of an asymmetric return-volatility relation in the Bitcoin market. They test if there is a difference in the return-volatility relation before and after the price crash of 2013 and show a significant inverse relation between past shocks and volatility before the crash and no significant relation after. This finding shows that, prior to the price crash of December 2013, positive shocks increased the conditional volatility more than negative shocks. This inverted asymmetric reaction of Bitcoin to positive and negative shocks is contrary to what the authors observe in equities. As leverage effect and volatility feedback don’t adequately explain this reaction, they propose the safe-haven effect (Baur, Asymmetric volatility in the gold market, 2012). The authors highlight the benefits of adding Bitcoin to a US equity portfolio, especially in the pre-crash period. Robustness analyses show, among others, a negative relation between the US implied volatility index (VIX) and Bitcoin volatility. Those additional analyses further support their findings and provide useful information for economic actors who are interested in adding Bitcoin to their equity portfolios or are curious about the capabilities of Bitcoin as a financial asset.

Data Set

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    [text/tab-separated-values, 245K]

JEL Classification:

G11, G15


  • Downloads: 1811


Cite As

Elie Bouri, Georges Azzi, and Anne Haubo Dyhrberg (2016). On the Return-volatility Relationship in the Bitcoin Market Around the Price Crash of 2013. Economics Discussion Papers, No 2016-41, Kiel Institute for the World Economy. http://www.economics-ejournal.org/economics/discussionpapers/2016-41

Comments and Questions

Diganta Mukherjee - Interesting paper
October 05, 2016 - 09:51

I liked the paper a lot on three counts. One, it addresses a new and very exciting market - that of Bitcoin - which deserves much more attention from the academic community than presently. Second, it presents a very simple yet illuminating exercise with a clear focus. And last but ...[more]

... not the least, the paper also offers a glimpse into an all new investment opportunity for portfolio managers.

Anonymous - Comment
November 14, 2016 - 13:33

The paper fits an asymmetric GARCH model to several Bitcoin return series and examines the relation between the return and volatility before and after the price crash of December 2013. Empirical results reveal an inverse and significant relation between Bitcoin return and volatility only before the crash, suggesting the end ...[more]

... of the safe haven status.

General comments:
Examining the return-volatility relationship in the Bitcoin market is a relatively new and very interesting topic. Not only the basic idea is novel and represents a significant contribution to our understanding of Bitcoin in investment strategy, but also the paper flows well, and despite the sophistication of the analysis, it is explained very well. I am impressed with the writing style of the authors. In this sense, I find the paper to be very good and contains new information adequate to justify publication.

Detailed comments:
1- The introduction section clearly identifies / defines the research problem, and explains the paper's place and contribution within the existing literature.

2- The research method is properly described and executed, and the empirical results and analysis are rigorous and well presented. Interestingly, I liked the added value arising from the well-developed empirical analysis (Section 4). In particular, I appreciated the portfolio implications and the inclusion of the VIX in the – extended – asymmetric GARCH model for the case of USD-denominated Bitcoin returns.

3- Besides the GJR-GARCH, there are other models for measuring asymmetries such as EGARCH and GARCH(A-PARCH). Therefore, I wonder why the authors have chosen the GJR-GARCH model from all the GARCH family models.
I hope my comments will be useful to the authors.

Elie Bouri, Georges Azzi, and Anne Haubo Dyhrberg - Reply to the Comment
November 15, 2016 - 14:56

We were pleased to read that the Invited Reader appreciates the contribution of our paper and draws attention to the added value of the empirical analysis.
Although we have chosen to fit the GJR-GARCH model to several Bitcoin return series, we could just as well have chosen the ...[more]

... EGARCH model or other asymmetric-GARCH models. Nevertheless, we have followed the line of Baur (2012) and used the GJR-GARCH model of Glosten et al. (1993). More importantly, the robustness analysis from Subsection 4.4 shows that the empirical findings have not been affected by the choice of the asymmetric GARCH model; in fact, we have employed the EGARCH model as well and found that the results remain qualitatively the same (i.e. inverse and significant relation between Bitcoin return and volatility only before the Bitcoin crash of 2013), suggesting that the empirical results are robust to the choice of the asymmetric GARCH model.

Anonymous - Referee Report 1
December 19, 2016 - 11:02

See attached file

Elie Bouri, Georges Azzi, and Anne Haubo Dyhrberg - Reply to Referee Report 1
January 02, 2017 - 15:20

See attached file