Trading volume and return volatility of Bitcoin market: evidence for the sequential information arrival hypothesis

Abstract

This paper gives the first empirical evidence on the relationships between trading volume and return volatility of the Bitcoin denominated in fifteen foreign currencies by investigating two competing hypotheses, i.e., mixture of distribution hypothesis (MDH) and sequential information arrival hypothesis (SIAH). Allowing for both linear and nonlinear correlation and causality tests, the empirical results mainly show that: first, trading volume and return volatility are negatively correlated, implying a lack of support for the MDH; second, we document significant lead–lag relationships between trading volume and return volatility, which support the SIAH; third, the results are robust to alternative measurements of trading volume, data source and sub-period analysis. Generally speaking, these findings have practical implications for investors, who are interested in investing in Bitcoin market.

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Notes

  1. 1.

    For example, the official definition in coinmarketcap.com is “Price is calculated by taking the volume weighted average of all prices reported at each market. Sources for the prices can be found on the markets section on each cryptocurrency page.” (https://coinmarketcap.com/faq/; access date: 2018-08-30). We note that the Bitcoin index of coinmarketcap.com is volume-weighed. One potential issue about the data is that it may not take into account of the exchange rate factors. While our constructed Bitcoin index is valued-weighted and denominated in the same currency, and the potential doubt on exchange rate factors can be avoided naturally. Besides, to alleviate the data issue, we also perform the robustness in Sect. 5.3.

  2. 2.

    Federal Reserve issues FOMC statement on December 13, 2013. See the news source on the Fed website: https://www.federalreserve.gov/newsevents/pressreleases/monetary20131218a.htm.

  3. 3.

    Refer to the second question on https://coinmarketcap.com/faq/ (accessed: 2018-08-30).

  4. 4.

    Trading volume of Bitcoin from coincapmarket.com is not available for about half a year: https://coinmarketcap.com/currencies/bitcoin/historical-data/?start=20130428&end=20180829 (access date: 2018-08-30).

  5. 5.

    We really appreciate that one reviewer point out this for us. To emphasize the international perspective, we separate this subsection from Sect. 5.2.

  6. 6.

    We do not report results of other monetary policy events to conserve space, but the full results are available upon request from the corresponding author.

  7. 7.

    Details of the monetary policy events of Vidal-Tomás and Ibañez (2018) are not lised in this study due to space constraints but we refer the reader to the original paper.

  8. 8.

    We do not report the full results of GMM to save space as the analysis of a1 and b1 is more important, but the full results are available upon request from the corresponding author.

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Acknowledgements

This work is supported by the National Natural Science Foundation of China (71701150, 71790590 and 71790594), Young Elite Scientists Sponsorship Program by Tianjin (TJSQNTJ-2017-09) and the Fundamental Research Funds for the Central Universities (63192237).

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Correspondence to Dehua Shen.

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Wang, P., Zhang, W., Li, X. et al. Trading volume and return volatility of Bitcoin market: evidence for the sequential information arrival hypothesis. J Econ Interact Coord 14, 377–418 (2019). https://doi.org/10.1007/s11403-019-00250-9

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Keywords

  • Bitcoin
  • Trading volume
  • Return volatility
  • Mixture of distribution hypothesis
  • Sequential information arrival hypothesis
  • Foreign currencies

JEL Classification

  • G12
  • G14