Price discovery in bitcoin spot or futures during the Covid-19 pandemic? Evidence from the time-varying parameter vector autoregressive model with stochastic volatility

ABSTRACT

This paper examines price discovery between bitcoin spot and futures using static measures, namely information share (IS), component share (CS), modified information share (MIS), information leadership share (ILS), impulse response, and a time-varying parameter vector autoregressive (TVP-VAR) model with stochastic volatility and Markov Chain Monte Carlo (MCMC) sampling algorithm. Our one-minute and daily datasets cover 16 months before and 16 months during the Covid-19 pandemic (November 2018 to June 2021). Our IS, CS, MIS and impulse response results indicate a stronger bitcoin spot leadership, whereas our ILS results point to a weaker bitcoin futures dominance, during the Covid-19 pandemic. We construe this, as far as microstructure noise is concerned, as meaning that the bitcoin price is discovered in the spot market, and its dominance appears to have strengthened during the pandemic. However, as far as ‘pure speed’ is concerned, price discovery takes place in the bitcoin futures market, and its leadership seems to have weakened during the Covid-19 pandemic. The results of the time-varying measure (TVP-VAR) imply that, before the pandemic, price discovery took place within bitcoin futures but, during the pandemic, price discovery leadership has changed course, to occur within bitcoin spot.

KEYWORDS:

• Bitcoin
• price discovery
• TVP-VAR
• Markov Chain Monte Carlo
• futures
• Covid-19

JEL CLASSIFICATION:

• G13
• G14

Acknowledgement

We thank Prof David Peel and four anonymous reviewers for their insightful comments on earlier version of this paper. We are extremely grateful to M Ezman Zainudin for helping us with computing support.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Correction Statement

This article has been republished with minor changes. These changes do not impact the academic content of the article.

Notes

¹ Alexander and Dakos (2020) warn of the use of cryptocurrency data from questionable sources, non-traded prices and non-synchronous data. We believe we have utilized the correct traded and synchronous bitcoin data, from a reputable exchange, namely Bitstamp, through Refinitiv Eikon, using the code BTSP and matching the spot with the nearest-to-maturity 1-min futures closing prices (see, for example, Booth, So, and Tse 1999; Cabrera, Wang, and Yang 2009). The most actively traded futures contract is normally the nearest-to-maturity contract, until the last trading day before maturity (Entrop, Frijns, and Seruset 2020).

Additional information

Funding

This work was supported by the Kulliyyah of Economics and Management Sciences [DEBA22-011-0017]. We are very thankful to DeBA KENMS, IIUM for granting the research support.