Risk Aversion and Bitcoin Returns in Normal, Bull, and Bear Markets

Abstract

We study whether level of risk aversion can be used to predict Bitcoin returns. Using a copula-quantile approach, we find evidence of predictability for the lower and upper quantiles of the conditional distribution of returns (i.e., in bull and bear markets). To reveal the sign of the predictability, we apply the cross-quantilogram approach and find that the cross-quantilogram is similar when risk aversion is at the low or medium level for various quantiles of Bitcoin returns. In particular, we find positive predictability when the risk aversion is very low and at the medium level. However, the predictability becomes negative when both the risk aversion and Bitcoin returns are very high, suggesting that very high levels of risk aversion are likely to drive down Bitcoin returns in a bull market.