Comparing Bitcoin Volatility Models and Trading the Forecast–Implied Volatility Spread

Summary

This study compares historical volatility, exponential moving average ARCH, GARCH, and EGARCH models using Bitcoin spot prices. It reports that GARCH and EGARCH perform better than the alternatives in both in-sample fit and out-of-sample forecasting. The EGARCH asymmetry estimate is positive but statistically insignificant, which the authors interpret as evidence against an asymmetric volatility response to past returns in their analysis.

The study also proposes an options strategy that trades the difference between forecast volatility from GARCH and options’ implied volatility, with delta hedging. It reports robust profits for this simple volatility-spread strategy. The brief account gives no sample period, trading rules, transaction-cost assumptions, or definition of robustness, so the profitability claim cannot be independently assessed from the information provided. Results on Bitcoin spot and option markets may also depend on the data and market conditions examined.

Key ideas

• The comparison covers historical, EMA ARCH, GARCH, and EGARCH volatility models.
• GARCH and EGARCH are reported to outperform the other models in fit and forecasting.
• The EGARCH asymmetry estimate is positive but statistically insignificant.
• The proposed options strategy trades forecast volatility against implied volatility with delta hedging.
• The profitability claim lacks supporting details such as sample period and cost assumptions.

Tags

# A Horserace of Volatility Models for Cryptocurrency: Evidence from Bitcoin Spot and Option Markets


# A Horserace of Volatility Models for Cryptocurrency: Evidence from Bitcoin Spot and Option Markets









We test various volatility models using the Bitcoin spot price series. Our models include HIST, EMA ARCH, GARCH, and EGARCH, models. Both of our in-sample-fit and out-of-sample-forecast results suggest that GARCH and EGARCH models perform much better than other models. Moreover, the EGARCH model's asymmetric term is positive and insignificant, which suggests that Bitcoin prices lack the asymmetric volatility response to past returns. Finally, we formulate an option trading strategy by exploiting the volatility spread between the GARCH volatility forecast and the option's implied volatility. We show that a simple volatility-spread trading strategy with delta-hedging can yield robust profits.

Shown in full with attribution under the source's licence. Licence: abstract CC0

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.