Is there a risk-return trade-off in cryptocurrency markets? The case of Bitcoin

• Published in: Journal of economics and business 2020-03, Vol.108, p.105886, Article 105886
• Main Author: Ahmed, Walid M.A.
• Format: Article
• Language: English
• Subjects: Bitcoin; Cryptocurrency markets; Intraday data; Realized volatility measures; Risk-return trade-off
• ISSN: 0148-6195
• DOI: 10.1016/j.jeconbus.2019.105886

•The return-volatility relations in Bitcoin markets are examined.•Volatility proxies are realized variance, downside realized semivariance, and negative signed jump variation.•The contemporaneous return-volatility relation is significantly negative.•The intertemporal return-volatility relation is negative but weak.•Evidence lends no support to the risk-return trade-off hypothesis in Bitcoin markets. This study examines the link between returns and volatility of Bitcoin, at both contemporaneous and intertemporal levels, employing high-frequency data. The intraday price variability is proxied by four different measures, namely realized variance, jump variation, downside realized semivariance, and negative signed jump variation. The empirical analysis suggests that all realized volatility proxies have a significant and negative contemporaneous relation with Bitcoin returns. On the other hand, there is weak evidence of a negative intertemporal relation between returns and realized variance, jump variation, and downside realized semivariance. Accordingly, the existence of a positive risk-return trade-off in Bitcoin markets seems to be unsubstantiated. The findings are robust, even after controlling for a number of relevant determinants of the price formation process of Bitcoin.