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An analysis of price discovery between Bitcoin futures and spot markets

An analysis of price discovery between Bitcoin futures and spot markets
An analysis of price discovery between Bitcoin futures and spot markets

This paper analyzes the Bitcoin price discovery process. We collect data on futures and spot prices for the period December 2017 to May 2018 and compute Hasbrouck's information share and Gonzalo and Granger's common factor component to quantify the contribution of each market to the price discovery process. Both measures coincide in suggesting that the Bitcoin futures market dominates the price discovery process. We also find that both prices are driven by a common factor that is given by a weighted combination of the futures and spot market. Finally, we observe that deviations from the equilibrium condition equating the futures and spot log-price have predictive ability for the return on the Bitcoin spot price but not on the futures price.

Bitcoin, Cointegration, Information share, Permanent–transitory decomposition, Price discovery
0165-1765
62-64
Kapar, Burcu
92416c2b-880f-41a0-bf73-15042d9bf993
Olmo, Jose
706f68c8-f991-4959-8245-6657a591056e
Kapar, Burcu
92416c2b-880f-41a0-bf73-15042d9bf993
Olmo, Jose
706f68c8-f991-4959-8245-6657a591056e

Kapar, Burcu and Olmo, Jose (2019) An analysis of price discovery between Bitcoin futures and spot markets. Economics Letters, 174, 62-64. (doi:10.1016/j.econlet.2018.10.031).

Record type: Article

Abstract

This paper analyzes the Bitcoin price discovery process. We collect data on futures and spot prices for the period December 2017 to May 2018 and compute Hasbrouck's information share and Gonzalo and Granger's common factor component to quantify the contribution of each market to the price discovery process. Both measures coincide in suggesting that the Bitcoin futures market dominates the price discovery process. We also find that both prices are driven by a common factor that is given by a weighted combination of the futures and spot market. Finally, we observe that deviations from the equilibrium condition equating the futures and spot log-price have predictive ability for the return on the Bitcoin spot price but not on the futures price.

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Bitcoin_FuturesPaper_final_revised - Accepted Manuscript
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More information

Accepted/In Press date: 26 October 2018
e-pub ahead of print date: 1 November 2018
Published date: 1 January 2019
Keywords: Bitcoin, Cointegration, Information share, Permanent–transitory decomposition, Price discovery

Identifiers

Local EPrints ID: 426715
URI: https://eprints.soton.ac.uk/id/eprint/426715
ISSN: 0165-1765
PURE UUID: 0ab6b539-4db5-4b77-9ae9-67b5eaac7129
ORCID for Jose Olmo: ORCID iD orcid.org/0000-0002-0437-7812

Catalogue record

Date deposited: 10 Dec 2018 17:32
Last modified: 10 Dec 2019 01:35

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Contributors

Author: Burcu Kapar
Author: Jose Olmo ORCID iD

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