Abstract
The study uses 5-min intraday Bitcoin futures and spot prices to investigate the additive and multiplicative impact of arbitrage opportunities on feedback trading in the Bitcoin futures market. The basis, equal to the difference between Bitcoin spot and futures prices, is used to proxy arbitrage opportunities. The study uses quantile regressions to capture different market conditions. The study documents episodic cases of positive and negative feedback trading. The resulting evidence reveals that the intensity and type of feedback trading largely depend on market conditions and the degree of arbitrage opportunities. From the multiplicative model, the impact of arbitrage opportunities on positive feedback trading is strongest in the extreme bear market, lowest in the regular market conditions, and absent in the bull market conditions. Channel “breakouts” analysis indicates positive feedback traders dominate during bear and normal market conditions. When the basis declines by varying magnitudes across quantiles, positive feedback trading shifts to negative feedback trading. The findings suggest widening basis intensifies negative feedback trading during bull market conditions. However, when the basis decreases by varying scales across upper quantiles, negative feedback trading switches to positive feedback trading. By observing the trading signals, investors can adjust their portfolio positions to maximize returns and minimize risk.
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