Leverage effect in cryptocurrency markets

In this article we study the leverage effect in cryptocurrency markets using a stochastic volatility model with simultaneous and correlated jumps in returns and volatility. We estimate the model using an efficient sequential learning algorithm with daily data on four actively traded cryptocurrencies including Bitcoin, Ethereum, Chainlink, and Litecoin. Doing so allows us to sequentially learn about the return-volatility relationships and the leverage effect in these cryptocurrencies when new data come in. We find that these relationships depend on both the diffusive and jump components of correlations between returns and volatility. Interestingly, the diffusive and jump components often have opposite signs for these currencies; that is, while the diffusive component may exhibit a negative return-volatility relationship (the “leverage effect”), the jump component may show a positive relationship (the “inverse leverage effect”). As a result, the total leverage effect can be quite different from the diffusive leverage effect, due to the presence of correlated jumps in returns and volatility. Overall, we provide evidence that these jumps matter greatly to the total leverage effect in cryptocurrency markets.

© This manuscript version is made available under the CC-BY-NC-ND 4.0 license https://creativecommons.org/licenses/by-nc-nd/4.0/

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Work Title Leverage effect in cryptocurrency markets
Access
Open Access
Creators
  1. Jing Zhi Huang
  2. Jun Ni
  3. Li Xu
Keyword
  1. Leverage effect
  2. Cryptocurrency
  3. Sequential learning
  4. Stochastic volatility
  5. Simultaneous and correlated jumps
  6. Particle filters
License CC BY-NC-ND 4.0 (Attribution-NonCommercial-NoDerivatives)
Work Type Article
Publisher
  1. Pacific-Basin Finance Journal
Publication Date May 25, 2022
Publisher Identifier (DOI)
  1. https://doi.org/10.1016/j.pacfin.2022.101773
Deposited May 31, 2023

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Version 1
published

  • Created
  • Added HuangNiXu-Crypto-04-2022-PBFJ.pdf
  • Added Creator Jing Zhi Huang
  • Added Creator Jun Ni
  • Added Creator Li Xu
  • Published
  • Updated Keyword, Publisher, Publication Date Show Changes
    Keyword
    • Leverage effect, Cryptocurrency, Sequential learning, Stochastic volatility, Simultaneous and correlated jumps, Particle filters
    Publisher
    • Pacific Basin Finance Journal
    • Pacific-Basin Finance Journal
    Publication Date
    • 2022-06-01
    • 2022-05-25
  • Updated