Has the Introduction of Bitcoin Futures on Regulated Exchanges Decreased Price Volatility?

Abstract

Bitcoin is a tremendously debated phenomenon in the world of finance and in recent the scientific literature on the topic has expanded. In this thesis,the bitcoin to US dollar exchange rate is examined through various conditional variance models to describe its highly volatile nature. We examine whether the introduction of bitcoin futurescontractsin late 2017 has had a decreasing impact on price volatility by estimatingthe unconditional variance. The log-return of the bitcoin exchange rate is analysed,and there is evidence of volatility clustering and time-varying volatility. Consequently, the variance is modelled through the GARCH(1,1), EGARCH(1,1) and GJR-GARCH(1,1) modelswith innovations followingthree distributions. The in-sample selection method selectedthe EGARCH(1,1) model where innovation terms follow a generalizederror distribution as the most parsimonious model. The findings show that volatilityhas not decreased after the introduction of bitcoin futures on regulated exchanges. Keywords: Bitcoin, conditional variancemodelling, bitcoin futures, price volatility exchange rate, statistical analysis