Asymmetric Effects on Risks of Virtual Financial Assets (VFAs) in different regimes: A Case of Bitcoin

Zhenghui Li; Hao Dong; Zhehao Huang; Pierre Failler; Zhenghui Li; Hao Dong; Zhehao Huang; Pierre Failler

doi:10.3934/QFE.2018.4.860

Quantitative Finance and Economics

2018, Volume 2, Issue 4: 860-883. doi: 10.3934/QFE.2018.4.860

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Research article

Asymmetric Effects on Risks of Virtual Financial Assets (VFAs) in different regimes: A Case of Bitcoin

1.
Guangzhou International Institute of Finance, Guangzhou University, Guangzhou, P.R.China
2.
School of Economics and Statistics, Guangzhou University, Guangzhou, P.R.China
3.
Department of Economics and Finance, Portsmouth Business School, University of Portsmouth, Portsmouth, P01 3DE, UK

Received: 12 November 2018 Accepted: 20 November 2018 Published: 22 November 2018
JEL Codes: C32, C44, C51

The rapid development of VFAs allows investors to diversify their choices of investment products. In this paper, we measure the return risk of VFAs based on GARCH-type model. By establishing a Markov regime-switching Regression (MSR) Model, we explore the asymmetric effects of speculation, investor attention, and market interoperability on return risks in different risk regimes of VFAs. The results show that the influences of speculation and investor attention on the risks of VFAs are significantly positive at all regimes, while market interoperability only admits a positive impact on risk under high risk regime. All of the three factors exert asymmetric effects on risks in different regimes. Further study presents that the risk regime-switching also shows asymmetric characteristic but the medium risk regime is more stable than any others. Therefore, transactions of investors and arbitrageurs are monitored by certain policies, such as limiting the number of transactions or restricting the trading amount at high risk regime. However, when return risk is low, it will return to a medium level if we encourage investors to access.
- asymmetric effect,
- market risk,
- Virtual Financial Assets,
- Bitcoin,
- Markov regime switching model
Citation: Zhenghui Li, Hao Dong, Zhehao Huang, Pierre Failler. Asymmetric Effects on Risks of Virtual Financial Assets (VFAs) in different regimes: A Case of Bitcoin[J]. Quantitative Finance and Economics, 2018, 2(4): 860-883. doi: 10.3934/QFE.2018.4.860

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Abstract

The rapid development of VFAs allows investors to diversify their choices of investment products. In this paper, we measure the return risk of VFAs based on GARCH-type model. By establishing a Markov regime-switching Regression (MSR) Model, we explore the asymmetric effects of speculation, investor attention, and market interoperability on return risks in different risk regimes of VFAs. The results show that the influences of speculation and investor attention on the risks of VFAs are significantly positive at all regimes, while market interoperability only admits a positive impact on risk under high risk regime. All of the three factors exert asymmetric effects on risks in different regimes. Further study presents that the risk regime-switching also shows asymmetric characteristic but the medium risk regime is more stable than any others. Therefore, transactions of investors and arbitrageurs are monitored by certain policies, such as limiting the number of transactions or restricting the trading amount at high risk regime. However, when return risk is low, it will return to a medium level if we encourage investors to access.

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