An Econometric Study on Volatility Clusters, Dynamic Risk Return Relationship, and Asymmetry in Bitcoin Returns

Abstract

The most sought-after cryptocurrency sector is facing dicey environment in India due to stringent ideology of its government that put Indian investors in dilemma in envisaging this sector as a virtuous investment avenue. The investors are very curious for this sector and their curiosity aroused the need for its evaluation in terms of risk-return dynamics in contemporary scenario. The present study is an endeavor to econometrically explore volatility clusters, dynamic risk return relationship, and asymmetry in Bitcoin return series covering the period from August 2010 to February 2022. The results of Augmented Dickey–Fuller test, Ng–Perron tests, Ljung Box Q test, Engle’s ARCH, and White test asserted that the Bitcoin return series is stationary and has apparent volatility clusters in it. The estimates from GARCH-M model confirmed the absence of risk return relationship and the estimates from ARMA-EGARCH model confirmed the presence of asymmetry (leverage effect) in Bitcoin return series. However, the results of ARMA-TARCH model confirmed the absence of asymmetry in the series and further diagnostic checking asserted that ARMA- TARCH model is the best fitted model. These estimations may help the investors in comprehending risk-return dynamics of investment in Bitcoins for framing better hedging strategy in contemporary scenario.