In the financial markets, recurrent patterns have significant implications for volatility measurement, modeling, and forecasting. For example, while measuring volatility, it is valuable to know if the observed change in volatility merely follows the expected pattern or reflects an unanticipated change. Similarly, understanding the empirical patterns in trading volume makes it easier to distinguish between the usual variations and unexpected shifts.
The high-frequency data in cryptocurrency markets is available at any time of the day, which facilitates the studies of periodicity measures beyond what’s possible in other markets. Previous studies have documented the recurrent patterns in cryptocurrencies and found that variation in volatility and volume coincides with the stock exchange trading hours or algorithmic trading activities. The research paper by Hansen, Kim, and Kimbrough (2021) investigates the periodicity in volatility and liquidity in two major cryptocurrencies, Bitcoin and Ether, using data from three exchanges, Binance, Coinbase Pro, and Uniswap V2. In particular, the authors measure relative volatility and relative volume across days, hours, and minutes. Their results have confirmed the presence of recurrent patterns in volatility and volume in studied cryptocurrencies for the periods day-of-the-week, hour-of-the-day, and within the hour. Although the first two findings were already reported in previous research, this is the first study to document the distinct patterns within an hour. Specifically, Bitcoin and Ether exhibit a large burst in volatility during the first minute of the hour, medium bursts immediately after 15, 30, and 45 minutes, and smaller bursts every five minutes. The authors postulate that many of these patterns are driven by algorithmic trading, while some are likely related to funding rates for perpetual futures. Therefore, understanding the periodicity in cryptocurrency markets is crucial for the proper interpretation of real-time changes in volatility and volume.
Authors: Peter Reinhard Hansen, Chan Kim, and Wade Kimbrough
Title: Periodicity in Cryptocurrency Volatility and Liquidity
We study recurrent patterns in volatility and volume for major cryptocurrencies, Bitcoin and Ether, using data from two centralized exchanges (Coinbase Pro and Binance) and a decentralized exchange (Uniswap V2). We find systematic patterns in both volatility and volume across day-of-the-week, hour-of-the-day, and within the hour. These patterns have grown stronger over the years and can be related to algorithmic trading and funding times in futures markets. We also document that price formation mainly takes place on the centralized exchanges while price adjustments on the decentralized exchanges can be sluggish.
As always we present several interesting figures:
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