Received: 16 March 2020 | Accepted: 18 May 2020

DOI: 10.1002/fut.22144

RESEARCH ARTICLE

Forecasting bitcoin volatility: Evidence from the options

market

Lai T. Hoang1,2 | Dirk G. Baur1

1
UWA Business School, The University of
Western Australia, Crawley, Abstract
Western Australia, Australia This paper studies a large number of bitcoin (BTC) options traded on the
2
National Economics University, Hanoi, options exchange Deribit. We use the trades to calculate implied volatility (IV)
Vietnam
and analyze if volatility forecasts can be improved using such information. IV
Correspondence is less accurate than AutoRegressive–Moving‐Average or Heterogeneous Auto‐
Lai T. Hoang, UWA Business School, The
Regressive model forecasts in predicting short‐term BTC volatility (1 day
University of Western Australia, Crawley,
WA 6009, Australia. ahead), but superior in predicting long‐term volatility (7, 10, 15 days ahead).
Email: lai.hoang@uwa.edu.au Furthermore, a combination of IV and model‐based forecasts provides the
highest accuracy for all forecasting horizons revealing that the BTC options
market contains unique information.

KEYWORDS
bitcoin, bitcoin options market, forecasting, implied volatility, realized volatility

JEL CLASSIFICATION
G12; G13; G14

1 | INTRODUCTION

Bitcoin (BTC) has grabbed the attention of academics since its inception in 2008 and particularly since its bubble‐like
price rise in 2017. This has led to a large number of papers examining various aspects of BTC, such as market efficiency
(e.g., Kristoufek, 2018; Tiwari, Jana, & Roubaud, 2018; Urquhart, 2016), its properties compared to other assets (e.g.,
Baur, Hong, & Lee, 2018; Corbet, Lucey, Urquhart, & Yarovaya, 2019; Dyhrberg, 2016; Yermack, 2013), and the linkages
with other cryptocurrencies (e.g., Baur & Hoang, 2020; Katsiampa, Corbet, & Lucey, 2019; Yi, Xu, & Wang, 2018).
Recent literature also studied BTC futures after the Chicago Board Options Exchange (CBOE) and the Chicago Mer-
cantile Exchange (CME) introduced futures contracts on BTC in December 2017.1
Interestingly, there is no study on BTC options despite its informational role and its potential relevance to enhance
our understanding about BTC trading and risk preferences of BTC investors. Options have advantages over futures as
they have relatively short maturities and different strike prices (e.g., see Kelly, Pastor, & Veronesi, 2016). Another key
advantage of options over futures and spot markets is that options prices carry information of investors' expectations
about future volatility (i.e., implied volatility [IV]), which allows a direct examination on the relevance of such unique
information.

1
Baur and Dimpfl (2019) use intraday data from regulated futures exchanges and find that the BTC spot price leads the futures price, indicating that
the information content on those futures markets is negligible. In contrast, Alexander, Choi, Park, and Sohn (2020) show for the unregulated futures
exchange BitMEX that it plays a leading role in the price discovery process.

J Futures Markets. 2020;1–19. wileyonlinelibrary.com/journal/fut © 2020 Wiley Periodicals LLC | 1

2 | HOANG AND BAUR

The lack of studies on BTC options and IV of BTC2 is in stark contrast to the growing literature on the volatility of
BTC and volatility prediction (e.g., Katsiampa et al., 2019; Klein, Thu, & Walther, 2018; Shen, Urquhart, & Wang, 2019).
It may also be surprising given the role of options‐IV for forecasting volatility and for investors to anticipate risks and
implement appropriate hedging strategies (Frijns, Tallau, & Tourani‐Rad, 2010).
Hence, this paper contributes to the literature on BTC, options trading and options‐IV. We assess the accuracy of IV
derived from BTC options prices in forecasting future volatility and compare the relative forecasting power of IV with
that of forecasts generated by time‐series models (i.e., Generalized AutoRegressive Conditional Heteroskedasticity
(GARCH), AutoRegressive–Moving‐Average (ARMA) and Heterogeneous Auto‐Regressive (HAR)). We also study
whether IV contains any incremental information beyond model‐based forecasts.
Earlier studies that compare the forecasting power of option‐IV and GARCH‐type models generally conclude that
the former outperforms the latter (e.g., Day & Lewis, 1992 in stock markets and Jorion, 1995 in foreign exchange
markets). Instead of daily data used in GARCH‐type models, recent studies increasingly use models based on intraday
data and realized volatility (e.g., ARMA or ARFIMA) and find that such models generate comparable or even better
forecasts than IV (e.g., Kambouroudis, McMillan, & Tsakou, 2016; Martens & Zein, 2004; Pong, Shackleton, Taylor, &
Xu, 2004). However, IV still provides some incremental information and thus improves the forecasting performance
when it is combined with model‐based forecasts (Busch, Christensen, & Nielsen, 2011; Haugom, Langeland, Molnár, &
Westgaard, 2014). Since all prior studies focus on either stocks, foreign exchange or commodities markets, we con-
tribute to the literature with new evidence from the cryptocurrency market.
We use options data from Deribit—the largest albeit unregulated BTC options exchange as of February 2020.
During 2019, the daily trading volume of options contracts on Deribit regularly reached 5,000 BTC which was
equivalent to about 50 million USD. Although BTC options were also launched on the regulated exchange CME on
January 13, 2020, its trading volume is still much lower than that of Deribit,3 suggesting that the CME options exchange
is in an early stage with very limited data available rendering an empirical analysis difficult. We also observe that
trading volume on Deribit dominates all other existing BTC options exchanges.4 This leading role of Deribit justifies the
focus on this exchange for BTC options.
Our results indicate that option‐IV is generally less accurate than parametric time‐series models in predicting 1‐day
ahead volatility, but superior in long‐term prediction (7, 10, 15 days ahead). In addition, regardless of forecasting
horizons, IV consistently contains incremental information that is not available in model‐based forecasts. Thus, a
combination of IV and parametric volatility models is able to improve the forecasts. It is important to note though that
this finding is not necessarily a surprise as combinations of forecasts generally improve forecasts (e.g., see Bates &
Granger, 1969; Fameliti & Skintzi, 2020; Hendry & Clements, 2004; Kambouroudis et al., 2016; Liang, Wei, &
Zhang, 2020; Metaxoglou & Smith, 2017).
Despite the fact that the options exchange considered in this study (Deribit) is unregulated, BTC traders are
attracted by the investment opportunities provided by the exchange and appear to tolerate the lack of regulation. This
finding is consistent with Alexander et al. (2020) in the BTC futures market and also in line with the fact that BTC itself
is unregulated.
In addition, we contribute to another growing strand of the BTC literature, that is, volatility modeling and fore-
casting. Since BTC is extremely volatile, predicting its volatility is crucial for risk management. Although there is a large
body of literature assessing volatility forecasts in stocks, fiat currencies and commodities markets (e.g., Andersen,
Bollerslev, & Meddahi, 2005; Patton, 2011; Poon & Granger, 2003, among many others), research on BTC is relatively
scarce. Early studies attempt to model BTC volatility using several GARCH‐type models with daily returns and
compare the models' performance (e.g., Ardia, Bluteau, & Rüede, 2019; Katsiampa, 2017), but mainly focus on the in‐
sample goodness‐of‐fit of the models. Hence the conclusions on the “best” model do not necessary hold in out‐of‐
sample forecasts. Recently, exploiting the availability of intraday data, Shen et al. (2019) consider a comprehensive set
of 18 HAR‐type models and find that a HARQ‐F‐J model provides the best out‐of‐sample forecasts. We extend those
studies by examining various types of models, including GARCH, ARMA and HAR, and find that ARMA‐type models
generally provide better forecasts than GARCH‐type models for both 1‐day and 7‐day horizons. Interestingly, the
HARQ‐F‐J model, despite being documented in Shen et al. (2019) as the best among all HAR‐type models, performs
worse than all GARCH, ARMA and IV models.

2
One possible reason for this void in the literature is that BTC options are relatively young and thus may have been overlooked by researchers.
3
For example, trading volume on February 11, 2020 on Deribit was 159 million USD, while that on CME was 2 million USD.
4
A comparison of daily trading volume across BTC options exchanges is presented in Appendix A.
HOANG AND BAUR | 3

F I G U R E 1 Daily trading volume of

bitcoin options on Deribit (in thousands
BTC). BTC, bitcoin

The rest of the paper is structured as follows. Section 2 describes the Deribit options exchange and the data adopted
in the study. Section 3 introduces the models and econometric methodology, followed by the presentation and dis-
cussion of the empirical results in Section 4. Section 5 concludes.

2 | D E R I B I T OP T I ON S M A R K E T

Founded in 2016, Deribit is a BTC derivatives exchange based in the Netherlands. Listed products include BTC and
ether (ETH) futures, perpetual and options. Fiat currencies are not accepted on the exchange: all trades and settlements
are executed only in either BTC or ETH. Clients remain anonymous to Deribit since they only need an email address
and BTCs to trade on the exchange. A trader is only required to upload a photo of her government ID if she wants to
withdraw more than 1 BTC or 50 ETH per day. Thus, the exchange appears to be flexible in relation to regulations such
as Know Your Customer or Antimoney Laundering Rules. This may be attractive for BTC traders who want to preserve
their anonymity.
Although other forms of BTC derivatives such as futures and perpetuals contracts had been traded on several
exchanges before the establishment of Deribit (e.g., BitMEX was founded in 2014), Deribit is the first platform in the
world offering options and currently the largest in terms of daily trading volume. Options are European style and thus
cannot be exercised before expiration. Contracts are expired on each Friday at 08:00 GMT. The first options contracts
were created on June 15, 2016, but the first trade on the exchange was only executed 4 months later on November 29,
2016. The daily trading volume from the first trading day until February 11, 2020 is depicted in Figure 1. The trading
volume was negligible during the first year but started to increase from late 2016. The exchange grew significantly
recently with regular daily trading volume exceeding 5,000 BTC (equivalent to around 50 million USD) during 2019.
We obtain the options trading data from November 29, 2016 to February 11, 2020 via Deribit's application pro-
gramming interface that contains all trades during the period. A unique feature of Deribit compared to stocks, cur-
rencies or commodities exchanges is that it operates continuously 24/7 and there are no daily settlement prices. Instead,
Deribit calculates its own index price from eight BTC exchanges including Bitfinex, Bitstamp, Bittrex, Coinbase,
Gemini, ItBit, Kraken, and LMAX Digital. The index price then serves as the reference price to establish margin,
liquidation, and moneyness of options contracts. Deribit records the index price at time of execution for every trade in
the database, along with the timestamp and the executed price of the trade, the strike price and expiration time of the
options contract. The raw data contains 765,808 trades. We exclude 14,676 trades (1.92%) that violate options price
boundaries and thus cannot be used to estimate IV.5 We present a random sample of trades on December 8, 2019
extracted from Deribit's database in Appendix B.
Table 1 presents the number of trades and trading volume in BTC by different types of options. Panel A shows that
the number of trades and trading volume of call options are higher than that of put options. Among different categories

5
Such boundaries are derived based on the assumption that the asset can be easily sold short. This assumption is unlikely to hold for BTC.
4 | HOANG AND BAUR

TABLE 1 Trading volume by options types

Number of trade Volume

Call Put Call Put

Panel A: Time to expiration
Total 426,788 324,344 1,076,183 821,469
≤7 days (%) 36.56 39.45 30.53 34.35
8–30 days (%) 29.98 32.75 30.93 35.05
31–60 days (%) 13.44 12.68 14.47 14.48
61–90 days (%) 5.95 4.58 7.82 4.89
90–180 days (%) 10.03 7.85 11.55 8.22
≥180 days (%) 4.05 2.69 4.70 3.01
Panel B: Moneyness
Above 10% ITM (%) 6.03 7.73 3.73 3.63
3–10% ITM (%) 7.95 7.57 4.84 4.29
Near‐the‐money (%) 21.42 24.43 15.43 18.98
3–10% OTM (%) 21.13 24.67 20.80 25.74
Above 10% OTM (%) 43.47 35.61 55.20 47.36

Note: The first row reports the number of trades and trading volume (in BTC) on the Deribit options exchange from November 29, 2016 to February 11, 2020.
The remaining numbers are the percentage of the total number of trades or trading volume on put/call options of each time to expiration and moneyness
category. Near‐the‐money category includes options that are less than 3% ITM or OTM.
Abbreviations: ITM, in‐the‐money; OTM, out‐of‐the‐money.

of time to expiration, options investors tend to trade nearby contracts with more than 60% of trades and volume
concentrating on the groups with less than 1 month to expiration. This implies that nearby BTC options are generally
preferred by BTC options traders and thus more liquid. In Panel B, we follow Pan and Poteshman (2006) to use 3% and
10% differences between strike and index prices as cut‐off points to group trades into different moneyness categories.
An observation that is strikingly different from other assets is that bitcoin options investors tend to prefer deep out‐of‐
the‐money (OTM) contracts.6 We hypothesize that the extreme volatility of BTC can potentially explain the large
number of deep OTM contracts because excess volatility makes deep OTM contracts more attractive to speculators and
investors who want to hedge extreme price movements.

3 | METHODOLOGY

3.1 | IV estimation

Since each trade in the data set contains the timestamp of the trade, the trading price, the index price (spot price) at
time of execution, the strike price and the expiration date of the option, we first invert the Black–Scholes model (Black
& Scholes, 1973) to obtain the volatility implied in each trade using the United States. Three‐month T‐bills rate as the
risk‐free rate. We exclude trades of options contracts that have less than 8 days to expiration.7 In the second step we
calculate the average IV of all trades during the day to obtain a single, daily IV measure IVt :

N
IVt = ∑IVi, t , (1)
i =1

where IVi, t is the IV of trade i th on day t , and N is the number of trades executed on day t . Since the IV is a forward‐
looking measure reflecting the expectation of options traders on the average volatility of BTC from the trading time to
the expiration date (and we exclude options that have less than 8 days to expiration) we can directly use IVt as the

6
For other assets such as stocks, the literature generally documents the highest trading volume in near‐the‐money options. See, for example, Chang,
Hsieh, and Lai (2009) and Pan and Poteshman (2006).
7
This practice is common in estimating IV to avoid distortion effects which get more serious for very short maturities.
HOANG AND BAUR | 5

volatility forecast of BTC 1‐day and 7‐day ahead. As IV derived from the Black–Scholes model is an annualized measure
proportional to the squared root of time, the n‐day ahead forecast (starting from day t + 1) is calculated as n × IVt .
365

3.2 | Volatility forecasting models

In addition to testing whether IV predicts “true” future volatility, we assess its relative forecasting power by comparing
with that of model‐based forecasts. We first consider traditional GARCH(1,1) and TGARCH(1,1) models:

rt = μ + εt
εt ∣ Φt −1 ~ N (0, ht ) (2)
ht = ω + αεt2−1 + βht −1 + γεt2− t It −1

where rt is the daily return and ht is the conditional variance on day t given the available information set Φt−1. In the
TGARCH(1,1) model, It−1 and the coefficient γ capture the leverage (or asymmetric volatility) effect, with It−1 = 1 if
εt−1< 0 and zero otherwise. The asymmetric effect is not part of the GARCH(1,1) model.
According to Martens and Zein (2004) and Pong et al. (2004), volatility forecasts based on historical realized
volatility estimated using intraday returns can provide superior accuracy compared to GARCH variances and IV. Thus,
we incorporate in our analysis a HAR model with quarticity and jumps (HARQ‐F‐J) developed by Corsi (2009) and
Bollerslev, Patton, and Quaedvlieg (2016) which is documented in Shen et al. (2019) to provide superior forecasting
power among many HAR‐type models. The model is specified as follows:

RM[t +1, t + n] = β0 + (β1 + βq1 RQt ) RMt + (β7 + βq7 RQ w ) RMw

(3)
+(β30 + βq30 RQm ) RMm + βj Jt + εt ,

where RMt is the realized measure of BTC daily variance calculated as the sum of squared 5‐min returns (ri, t ) during day t

288
RMt = ∑ri2, t , (4)
i =1

then RMw and RMm are the average BTC realized variance over the last week and last month, respectively (RMw = 1
7
t t
∑k = t −6 RMk and RMm = 1 ∑k = t −29 RMk ). The dependent variable RM[t +1, t + n] is the average realized variance from day
30
t+n
t + 1 to day t + n calculated as 1 ∑k = t +1 RMk . RQt is the realized quarticity on day t
n

288
288 (5)
RQt = ∑ri4, t ,
3 i =1
t t
then RQ w = 1 ∑k = t −6 RQk and RQm = 1
∑ RQk are weekly and monthly realized quarticity respectively. Jt is
7 30 k = t −29
the daily discontinuous jump variation. Following Barndorff‐Nielsen and Shephard (2004) and Bollerslev et al. (2016),
Jt = max[RVt − BPVt , 0], where BPVt is the bipower variation calculated as follow:

277
π (6)
BPVt = ∑| ri, t || ri +1, t | .
2 i =1

To compute RM , RQ , and J , we use intraday price from five exchanges including Bitfinex, Bitstamp, Coinbase, itBit,
and Kraken downloaded from bitcoincharts.com. Those exchanges are consistently ranked as the largest and the most
liquid exchanges, thus well representing the BTC spot market and its information content.8 In addition, the five

8
According to https://data.bitcoinity.org, those five exchanges combined account for around 60% of BTC trading volume over the sample period.
6 | HOANG AND BAUR

exchanges also constitute the reference spot price index on Deribit, thus being particularly suitable for our analysis of
comparing information content of BTC spot and options markets. We use only five out of eight constituent exchanges of
the Deribit price index because intraday price data from Bittrex, Gemini, and LMAX Digital is unavailable. However,
since our purpose is to use intraday price to estimate realized volatility, and the trading volume on those three
exchanges are small,9 our analysis is unlikely to be affected by such data unavailability. We compute 5‐min BTC returns
as the difference of log prices in a 5‐min interval. Daily log returns are calculated using daily prices at 00:00 GMT.
In addition to HARQ‐F‐J, we also include in our analysis ARMA(1,1) and ARFIMA(1,d,1) models whose significant
forecasting power has been documented in a number of studies (e.g., Dunis, Kellard, & Snaith, 2013; Kambouroudis
et al., 2016; Martens & Zein, 2004; Pong et al., 2004, among others). ARMA(1,1) and ARFIMA(1,d,1) are specified in
Equations (7) and (8) respectively as follows:

yt = c0 + ϕ1 yt −1 + θ1 εt −1 + εt , (7)

ϕ (L)(1 − L)d (yt − μ) = θ (L) εt , (8)

where d is the degree of fractional integration, L is the lag operator, ϕ (L) and θ (L) are the polynomials that defines
autoregressive and moving average components respectively, and μ is the expected value of variable yt . We follow the
literature to estimate ARMA and ARFIMA models using the natural log of realized volatility yt = ln(RVt ),10 in which

288
RVt = RMt = ∑ri2, t . (9)
i =1

For each model, we first use 500 daily observations before the first option trading day (from July 18, 2015 to November
28, 2016) to estimate model parameters and then generate the first 1‐day and 7‐day ahead forecasts. Then after each day, we
include the observed data on that day and re‐estimate the model and the subsequent forecasts. This process results in a time‐
series of model‐based volatility forecasts for the next day and the next 7 days, starting from November 29, 2016.
Table 2 reports the estimated parameters of the above‐mentioned models using the full sample period (from July 18,
2015 to February 11, 2020). The results show that all GARCH parameters are statistically significant at the 1% level. In
contrast, and in line with Baur and Dimpfl (2018), the parameter γ in the TGARCH model is statistically insignificant
indicating that the leverage effect is not a feature of BTC volatility. Regarding the ARMA‐type models, ARFIMA(1,d,1)
has a better fit than ARMA(1,1) since the former exhibits a significantly higher log‐likelihood. The estimate for
parameter d is 0.481 and significantly different from zero suggesting that the BTC log realized volatility is fractionally
integrated and thus exhibits long memory. The HARQ‐F‐J model confirms the long memory since the coefficients of
β1, β7, and β30 are all statistically significant at the 1% level. Meanwhile, the jump component does not explain the
realized volatility since the estimate of βj is insignificant. This result is different to Shen et al. (2019) probably because of
very different sample periods with little overlap.11

3.3 | Forecasting performance evaluation

Since the in‐sample estimations do not allow a comparison of the forecasting performance of different types of models,
this section puts a focus on out‐of‐sample tests to assess the relative forecasting power of IV and parametric time‐series
models. Specifically, we compare volatility forecasts with the “true” future volatility of BTC using Equation (10).

σt = α + βht f + ϵt , (10)

9
Gemini accounts for only 3% of total trading volume during the research period, while Bittrex and LMAX are even smaller and not ranked by https://
bitcoinity.org.
10
Log transformation provides a more symmetric distribution of the realized volatility (Andersen, Bollerslev, Diebold, & Labys, 2001).
11
Our sample period is from late 2016 until early 2020, while Shen et al. (2019) study the period from January 2012 to September 2018.
HOANG AND BAUR | 7

TABLE 2 In‐sample estimation results

Panel A: GARCH‐type models

μ ω × 10 3 α β γ Log‐L
GARCH 0.002*** 0.083** 0.158*** 0.799*** 3,239.495
(0.001) (0.035) (0.038) (0.038)
TGARCH 0.002*** 0.084** 0.153*** 0.797*** 0.012 3,239.592
(2.73) (0.038) (0.041) (0.041) (0.051)
Panel B: ARMA‐type models
Constant AR (1) MA (1) d Log‐L
ARMA −3.723*** 0.936*** −0.467*** 929.56
(0.085) (0.012) (0.035)
ARFIMA −3.782*** −0.338 −0.399** 0.481*** 1,460.22
(1.147) (0.207) (0.198) (0.018)

Panel C: HARQ‐F‐J model

β0 β1 β7 β30 Adj R2
HARQ‐F‐J 0.0003*** 0.545*** 0.098*** 0.247*** 0.2905
(0.0001) (0.033) (0.065) (0.077)

βq1 βq7 βq30 βj

HARQ‐F‐J −1.082*** −0.437 −3.303 −0.048
(0.319) (0.832) (2.107) (0.223)

Note: This table present the in‐sample estimates of the GARCH models (2), the HARQ‐F‐J model (3), the ARMA model (7) and the ARFIMA model (8). The
sample period is from July 18, 2015 to February 11, 2020. *, **, and *** denote the significance levels of 10%, 5%, and 1%, respectively.
Abbreviations: ARMA, autoregressive–moving‐average; GARCH, generalized autoregressive conditional heteroskedasticity; HARQ‐F‐J, HAR model with
quarticity and jump.

where σt is the “true” volatility on day t which is proxied by daily realized volatility RVt estimated using Equation (9). ht f is
the forecast value of BTC volatility on day t based on information available on day t − 1 using either IV, (T)GARCH, AR
(FI)MA, or HARQ‐F‐J models. Since the dependent variable in the HARQ‐F‐J model is realized variance, we take the
square root of the predicted value to obtain the volatility forecast. For forecasting horizons longer than 1 day, t denotes the
whole period, and volatility measures are computed as the square root of sum of squared daily volatility during the period.
We use three alternative criteria to assess the performance of competing models, including the adjusted‐R2, the
mean absolute error (MAE) and the root mean squared error (RMSE).

T+N
1 (11)
MAE = ∑ | σˆt − σt | ,
N t = T +1
T+N
1 (12)
RMSE = ∑ (σˆt − σt )2 ,
N t = T +1

where N is the number of out‐of‐sample observations, and σ̂t is the fitted value from model (10). MAE measures the
average magnitude of the forecast errors without considering their direction. RMSE, while providing similar in-
formation, by construction gives higher weights to larger errors. The model with lower MAE and RMSE and higher
adjusted‐R2 is preferred.
To address the question whether BTC IV contains any additional information about future volatility beyond model‐
based forecasts, we run encompassing regressions as follows:

σt = α + β1 hIVf , t + β2 hMf , t + ϵt , (13)

8 | HOANG AND BAUR

F I G U R E 2 Daily implied and realized

volatility of bitcoin

where hIVf , t is implied volatility measure on day t − 1 and hMf , t is the model‐based volatility forecast. If BTC options
prices carry additional information about future volatility, β1 should be statistically significant, and the full model (13)
should provide a better fit than the nested model without hIVf , t .

4 | EMPIRICAL R ESULTS

Figure 2 shows a time‐series plot of daily IV and daily realized volatility (RV ).12 We observe a clear comovement between IV
and RV , suggesting strong predictive power of IV on future BTC volatility. We formally test this notion in the next sections.

4.1 | Comparison of forecasting performance

In this section, we run the regression model (10) to assess the performance of individual models in
forecasting future (1‐day and 7‐day ahead) volatility of BTC and report the results in Table 3. All estimated coefficients of ht f
are statistically significant at the 1% level suggesting that both IV and historical volatility are good predictors of future
volatility. A comparison across models shows that the forecasting power of IV is relatively low as the model with IV as the
predictor has the lowest adjusted‐R2 and the highest MAE and RMSE. Meanwhile, the ARMA‐type models provide the best
forecasts followed by the GARCH‐type models. The results suggest that the information content of IV is generally smaller
than that contained in historical prices in predicting 1‐day ahead volatility. This finding is in line with Pong et al. (2004) in
fiat currencies but in contrast to Martens and Zein (2004) in the S&P 500 stock index, implying that BTC is more currency‐
like from a volatility forecasting perspective.
Interestingly, for a longer forecasting horizon, that is 7 days, the forecasting accuracy of all time‐series
models decreases whereas that of IV significantly improves, rendering IV the best predictor of the next 7‐day
volatility. The significant improvement of IV over time‐series models in forecasting long‐term volatility is
intuitive. Since parametric time‐series models exclusively rely on historical data to generate forecasts, they are
better suited to predict short‐term volatility than long‐term. In contrast, IV reflects options traders' expected
volatility over the remaining lifespan of option contracts which usually spans multiple days or weeks and thus is
better suited for long‐term forecasts. Table 3 also indicates that the HARQ‐F‐J model, although being docu-
mented in Shen et al. (2019) as the best among several HAR‐type models, performs poorly compared to the

12
Since the IV derived from the Black–Scholes model is an annualized measure proportional to the squared root of time, we calculated daily IV by
dividing IV computed from Equation (1) by 365 .
HOANG AND BAUR | 9

TABLE 3 Out‐of‐sample predictive power of forecasting models

Panel A: 1‐day ahead

IV GARCH TGARCH ARMA ARFIMA HARQ‐F‐J
(1) (2) (3) (4) (5) (6)
f
ht 1.031*** 0.903*** 0.902*** 1.017*** 1.016*** 0.767***
(0.048) (0.034) (0.035) (0.034) (0.034) (0.034)
Constant −0.011*** −0.001 −0.001 0.004*** 0.003** 0.006***
(0.002) (0.002) (0.002) (0.001) (0.001) (0.001)
Adjusted‐R2 0.291 0.374 0.368 0.432 0.435 0.298
MAE × 10 0.1414 0.1275 0.1280 0.1210 0.1199 0.1378
RMSE × 10 0.2133 0.1998 0.2007 0.1903 0.1898 0.2118
F statistic 467.457*** 699.795*** 682.609*** 890.233*** 901.538*** 495.018***
Panel B: 7‐day ahead
(7) (8) (9) (10) (11) (12)
ht f 0.969*** 0.655*** 0.653*** 0.967*** 0.926*** 2.122***
(0.037) (0.033) (0.033) (0.043) (0.040) (0.110)
Constant −0.014*** 0.030*** 0.031*** 0.029*** 0.026*** 0.019***
(0.005) (0.004) (0.004) (0.004) (0.004) (0.005)
Adjusted R2 0.379 0.262 0.261 0.311 0.327 0.248
MAE × 10 0.3179 0.3436 0.3428 0.3312 0.3273 0.3472
RMSE × 10 0.4371 0.4764 0.4769 0.4605 0.4550 0.4810
F statistic 686.444*** 399.911*** 397.229*** 507.266*** 546.447*** 371.399***

Note: This table presents the regression results of model (10). The dependent variable is realized volatility (RV ) estimated as the square root of sum of squared 5‐
min returns during the forecasting horizon. hft denotes either implied volatility (IV ) or model‐based forecasts. Standard errors are in parentheses. *, **, and ***
denote the significance levels of 10%, 5%, and 1%, respectively.
Abbreviations: ARMA, autoregressive–moving‐average; GARCH, generalized autoregressive conditional heteroskedasticity; HARQ‐F‐J, HAR model with
quarticity and jump; MAE, mean absolute error; RMSE, root mean squared error.

ARMA‐type and GARCH‐type models: its forecasting accuracy is the second lowest for daily forecasts and the
lowest for 7‐day forecasts.

4.2 | Test for incremental information

Results for assessing the incremental information content of IV, that is the estimation of Equation (13), are presented in
Table 4 for 1‐day ahead forecasts and Table 5 for 7‐day ahead forecasts.
Table 4 shows that IV significantly improves the accuracy of the model‐based forecasts as the IV‐augmented bivariate
regressions (columns (1)–(5)) have higher adjusted‐R2 and lower MAE and RMSE than the univariate regressions reported
in columns (2)–(6) of Panel A of Table 3. The coefficients of IV are also statistically significant with the corresponding t
statistics all exceeding three. Thus although the magnitude of information content is smaller, there is significant incre-
mental information in IV beyond that is contained in forecasts based on GARCH‐type, ARMA‐type, or HARQ‐F‐J models.
The mutivariate encompassing regressions in columns (6) and (7) confirm the finding since the full model with IV (column
(7)) has higher adjusted‐R2 and lower MAE and RMSE than the nested model without (column (6)).
In contrast to Table 4, the results in columns (1)–(5) Table 5 show that all estimated coefficients of IV are
significantly higher than those of model‐based forecasts. Consistent with Panel B of Table 3, the results suggest that
the information content of IV on future volatility becomes larger in a longer forecasting horizon. The results also
provide stronger support for the incremental information of IV , which is consistent with the significant coefficient of
IV in column (7), higher adjusted‐R2 and lower MAE and RMSE compared to column (6).
10 | HOANG AND BAUR

TABLE 4 Encompassing regression: 1‐day ahead forecast

Dependent variable: 1‐day ahead realized volatility

(1) (2) (3) (4) (5) (6) (7)

IV 0.418*** 0.434*** 0.312*** 0.233*** 0.615*** 0.377***
(0.063) (0.063) (0.060) (0.064) (0.063) (0.076)
GARCH 0.674*** 0.525 0.691
(0.049) (0.466) (0.462)
TGARCH 0.658*** −0.161 −0.373
(0.049) (0.456) (0.453)
ARMA 0.834*** 0.822*** 1.609***
(0.049) (0.280) (0.319)
ARFIMA 0.871*** 0.065 −0.758**
(0.052) (0.260) (0.306)
HARQ‐F‐J 0.450*** −0.197*** −0.354***
(0.047) (0.069) (0.076)
Constant −0.010*** −0.010*** −0.005** −0.003 −0.010*** 0.001 −0.006***
(0.002) (0.002) (0.002) (0.002) (0.002) (0.002) (0.002)
2
Adjusted‐R 0.393 0.388 0.437 0.433 0.345 0.444 0.455
MAE × 10 0.1261 0.1267 0.1206 0.1206 0.1326 0.1191 0.1176
RMSE × 10 0.1974 0.1983 0.1902 0.1909 0.2051 0.1888 0.1867
F statistic 367.599*** 359.434*** 440.100*** 432.357*** 298.830*** 181.544*** 158.529***

Note: This table presents the estimation results of the encompassing regression (13) with the 1‐day forecasting horizon. Standard errors are in parentheses. *, **,
and *** denote the significance levels of 10%, 5%, and 1%, respectively.
Abbreviations: ARMA, autoregressive–moving‐average; GARCH, generalized autoregressive conditional heteroskedasticity; HARQ‐F‐J, HAR model with
quarticity and jump; MAE, mean absolute error; RMSE, root mean squared error.

4.3 | Robustness tests

4.3.1 | Volume‐weighted average IV

So far we have relied on the equally weighted average of all trades during the day as the measure of daily IV . In this section,
we conduct a robustness test using the trading volume weighted average (IVVW ) calculated using Equation (14) as follows:

N
∑i =1 VOLi, t × IVi, t (14)
IVVW , t = N
,
∑i =1 VOLi, t
where IVi, t is the implied volatility of trade i th on day t , VOLi, t is the trading volume (in BTC) of trade i th on day t , and
N is the number of trades executed on day t . Compared with the equally weighted average IV , IVVW gives more weight
to large trades that are potentially associated with more information (Easley & O'hara, 1987; Koski & Michaely, 2000).
The results shown in Table 6 are qualitatively similar to those reported above further supporting the information
content of BTC IV on future realized volatility.

4.3.2 | Different types of contracts

In the main analysis, we incorporate all trades during the day into the estimation of daily IV and find that average IV
contains unique information about future volatility. In this section, we further assess the robustness of our results by
using IV derived from various subsets of options trades, including in‐the‐money (IVITM ) and out‐of‐the‐money (IVOTM ),
close‐to‐the‐money (IVCTM ) and far‐from‐the‐money (IVFTM ), and close‐to‐expiration (IVCE ) and far‐from‐expiration
HOANG AND BAUR | 11

TABLE 5 Encompassing regression: 7‐day ahead forecast

Dependent variable: 7‐day ahead realized volatility

(1) (2) (3) (4) (5) (6) (7)

IV 0.801*** 0.804*** 0.694*** 0.687*** 0.863*** 0.904***
(0.052) (0.052) (0.050) (0.059) (0.055) (0.067)
GARCH 0.191*** −0.599 −0.310
(0.042) (0.466) (0.432)
TGARCH 0.189*** 0.731 0.324
(0.042) (0.456) (0.424)
ARMA 0.441*** 0.182 1.171***
(0.055) (0.163) (0.168)
ARFIMA 0.367*** 0.633*** −0.763***
(0.061) (0.186) (0.201)
HARQ‐F‐J 0.384** −0.011 −0.339
(0.149) (0.221) (0.206)
Constant −0.015*** −0.015*** −0.015*** −0.010** −0.017*** 0.023*** −0.021***
(0.005) (0.005) (0.005) (0.005) (0.005) (0.005) (0.005)
2
Adjusted‐R 0.389 0.389 0.412 0.398 0.382 0.330 0.424
MAE × 10 0.3136 0.3139 0.3047 0.3096 0.3156 0.3262 0.3010
RMSE × 10 0.4332 0.4333 0.4250 0.4302 0.4358 0.4531 0.4200
F statistic 359.314*** 358.860*** 395.252*** 371.964*** 348.246*** 111.762*** 138.806***

Abbreviations: ARMA, autoregressive–moving‐average; GARCH, generalized autoregressive conditional heteroskedasticity; HARQ‐F‐J, HAR model with
quarticity and jump; MAE, mean absolute error; RMSE, root mean squared error.
Note: This table presents the estimation results of the encompassing regression (13) with the 7‐day forecasting horizon. Standard errors are in parentheses. *, **,
and *** denote the significance levels of 10%, 5%, and 1%, respectively.

(IVFE ) options. Specifically, a call (put) option trade is defined as ITM if the index price at time of execution is higher
(lower) than the option's strike price. Otherwise it is classified as OTM. For each day, close‐to‐expiration trades involve
options with the shortest time to expiration (in days), and options expiring later are categorized as far‐from‐expiration.
We also sort all trades during the day based on the difference between the strike price and the index price. Then
following Ederington and Guan (2002) the close‐to‐the‐money group consists of two call and two put options that have
the smallest absolute differences, and the rest are grouped as far‐from‐the‐money. In all above classifications, similar to
the main test we exclude options that will expire within 8 days. Analogous to Equation (1), the daily IV derived from
each subset is calculated as the average IV of all trades in the subset during the day.
We rerun the regression Equation (13) using each of the IV measures IVITM , IVOTM , IVCTM , IVFTM , IVCE , and IVFE .
The results reported in Table 7 show that all coefficients β1 are positive and statistically significant at the 1% level. In addition,
adjusted‐R2 of all models are larger than that of the nested model without IV reported in column (6) of Table 4 and Table 5,
while MAE and RMSE are smaller. The results indicate that the forecasting power is robust to alternative measures of IV.
A comparison across IV measures indicates that OTM, far‐from‐the‐money and close‐to‐expiration options contain
more information about future volatility than ITM, close‐to‐the‐money and far‐from‐expiration options, respectively.
This finding is due to the former being associated with higher adjusted‐R2 and lower MAE and RMSE especially for
longer forecasting horizons, that is, 7 days ahead. This is consistent with the observation from Table 1 that nearby
options and deep OTM options are the most traded and thus embed more information.

4.3.3 | Different forecasting horizons

The results so far show that the information content of IV on future volatility is larger in the 7‐day forecasting horizon
compared to the 1‐day, suggesting that IV is better than parametric time‐series models in predicting long‐term
 12
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TABLE 6 Out‐of‐sample forecast using volume‐weighted average implied volatility

1‐Day ahead forecast 7‐day ahead forecast

(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13) (14)
IVVW 0.984*** 0.380*** 0.393*** 0.302*** 0.232*** 0.560*** 0.354*** 0.937*** 0.752*** 0.755*** 0.664*** 0.643*** 0.960*** 0.793***
(0.047) (0.060) (0.060) (0.056) (0.060) (0.060) (0.069) (0.036) (0.050) (0.050) (0.047) (0.055) (0.049) (0.060)
GARCH 0.696*** 0.625 0.221*** −0.052
(0.048) (0.459) (0.041) (0.396)
TGARCH 0.682*** −0.290 0.217*** 0.080
(0.048) (0.451) (0.041) (0.392)
ARMA 0.842*** 1.625*** 0.464*** 1.011***
(0.047) (0.310) (0.053) (0.205)
ARFIMA 0.874*** −0.742** 0.406*** −0.645***
(0.049) (0.295) (0.058) (0.238)
HARQ‐F‐J 0.463*** −0.370*** −0.033 −0.012
(0.044) (0.073) (0.047) (0.063)
Constant −0.009*** −0.010*** −0.010*** −0.005** −0.003 −0.006*** −0.008*** −0.012*** −0.014*** −0.014*** −0.014*** −0.010** −0.012** −0.020***
(0.002) (0.002) (0.002) (0.002) (0.002) (0.002) (0.002) (0.005) (0.005) (0.005) (0.005) (0.005) (0.005) (0.005)
MAE × 10 0.1428 0.1266 0.1273 0.1207 0.1207 0.1327 0.1180 0.3205 0.3154 0.3157 0.3072 0.3116 0.3201 0.3040
RMSE × 10 0.2154 0.1977 0.1987 0.1900 0.1907 0.2057 0.1863 0.4393 0.4338 0.4340 0.4250 0.4299 0.4392 0.4223
2
Adjusted R 0.278 0.391 0.385 0.437 0.433 0.341 0.457 0.370 0.385 0.384 0.409 0.395 0.369 0.415
F statistic 437.441*** 365.386*** 356.600*** 442.638*** 435.213*** 294.729*** 160.503*** 666.995*** 356.055*** 354.953*** 394.654*** 372.610*** 333.599*** 135.103***

Note: This table presents the estimation results of the univariate regression (10) and the encompassing regression (13) with 1‐day and 7‐day forecasting horizons using volume‐weighted average implied volatility
(IVVW ), which is calculated using Equation (14). Standard errors are in parentheses. *, **, and *** denote the significance levels of 10%, 5%, and 1%, respectively.
Abbreviations: ARMA, autoregressive–moving‐average; GARCH, generalized autoregressive conditional heteroskedasticity; HARQ‐F‐J, HAR model with quarticity and jump; MAE, mean absolute error; RMSE, root
mean squared error.
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HOANG AND BAUR | 13

TABLE 7 Implied volatility estimated from different types of options

Options type β1 (t stats) Adj. R2 MAE × 10 RMSE × 10

Panel A: 1‐day ahead
In‐the‐money (IVITM ) 0.2543***(4.12) 0.4784 0.1177 0.1790
Out‐of‐the‐money (IVOTM ) 0.3481***(4.27) 0.4790 0.1177 0.1789
Difference (IVITM − IVOTM ) −0.0006 0.0000 0.0001
Close‐to‐the‐money (IVCTM ) 0.2436***(3.14) 0.4450 0.1195 0.1895
Far‐from‐the‐money (IVFTM ) 0.4284***(5.61) 0.4556 0.1186 0.1877
Difference (IVCTM − IVFTM ) −0.0106 0.0009 0.0018
Close‐to‐expiration (IVCE ) 0.2208***(2.99) 0.4912 0.1152 0.1721
Far‐from‐expiration (IVFE ) 0.1868**(2.10) 0.4888 0.1154 0.1725
Difference (IVCE − IVFE ) 0.0024 −0.0002 −0.0004
Panel B: 7‐day ahead
In‐the‐money (IVITM ) 0.6538***(11.71) 0.4191 0.3002 0.4168
Out‐of‐the‐money (IVOTM ) 0.9096***(12.07) 0.4232 0.2996 0.4153
Difference (IVITM − IVOTM ) −0.0041 0.0006 0.0015
Close‐to‐the‐money (IVCTM ) 0.7913***(11.62) 0.4039 0.3059 0.4257
Far‐from‐the‐money (IVFTM ) 0.9037***(13.62) 0.4276 0.3007 0.4172
Difference (IVCTM − IVFTM ) −0.0237 0.0052 0.0085
Close‐to‐expiration (IVCE ) 0.8130***(12.29) 0.4581 0.2876 0.3942
Far‐from‐expiration (IVFE ) 0.8228***(9.54) 0.4273 0.2945 0.4053
Difference (IVCE − IVFE ) 0.0308 −0.0069 −0.111

Note: This table presents the estimated coefficients β1 and goodness‐of‐fit tests of the model (13) using various definitions of implied volatility (IV ). The
dependent variable is the realized volatility on the next day (Panel A) or on the next 7 days (Panel B). t statistics are in parentheses. *, **, and *** denote the
significance levels of 10%, 5%, and 1%, respectively.

volatility. However, the results might be driven by our arbitrary choice of forecasting horizon. To address this issue, in
this subsection we further examine various horizons. First, we extend the forecasting horizon to 10‐day and 15‐day.13
Consistent with the 7‐day forecasting horizon, the results reported in Table 8 for the 10‐day horizon and in Table 9 for
the 15‐day horizon show that the forecasting performance of IV always dominates that of model‐based forecasts. For
example, in univariate regressions, adjusted‐R2 of IV is around 40%, while that of model‐based forecasts are all less than
30%. A comparison of MAE, RMSE, and the significance of regression coefficients renders a similar conclusion.
So far, we follow the literature and fix the forecasting horizon. However, since IV measures options traders' expected
average volatility from the trading day to the expiration, fixing the forecasting horizon might undermine the forecasting
power of IV. For example, if the time to maturity from a trade is 20 days then the IV derived from the trade predicts the
average volatility in the next 20 days. If we compare the IV with the “true” (realized) volatility in the next 7 days, the
forecast may not be as good as for a 20‐day forecasting horizon because we ignore the volatility of the other 13 days.
Interestingly, prior literature seems to have overlooked this issue.14 Thus, we design a setting that allows flexible
forecasting horizons for all trades. Specifically, for each trade on day t we calculate realized volatility RV[t +1, t + n] from
day t + 1 to day t + n on which the option expires, then compare it with the n‐day ahead IV derived from the trade. We
also estimate n‐day ahead volatility forecasts from the time‐series models.
Similar to the main test, we run the regression model (13) to assess the incremental information of IV. The results
are reported in Table 10. In the univariate regressions (columns (1)–(6)), IV significantly predicts future volatility since
the estimated coefficient is 0.586 and statistically significant at the 1% level. When compared to model‐based forecasts
using adjusted‐R2, MAE and RMSE, IV is superior to all ARMA‐type, GARCH‐type models and the HARQ‐F‐J model.
This result is confirmed in bivariate regressions (columns (7)–(11)) where we observe larger regression coefficients of
IV compared to that of other model‐based forecasts.

13
Because IV reflects options traders' expected volatility from the trade to expiration, for the 10‐day (15‐day) forecasting horizon we recalculate
average IV using Equation (1) but only including options that have more than 10 (15) days to maturity.
14
Martens and Zein (2004) only consider the fixed 20 days to maturity that matches the 20‐day forecasting horizon, resulting in a very limited number
of observations.
 14
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TABLE 8 10‐day forecasting horizon

Dependent variable: 10‐day ahead realized volatility

(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13)
IV 0.984*** 0.914*** 0.913*** 0.831*** 0.861*** 0.951*** 1.029***
(0.036) (0.050) (0.050) (0.047) (0.057) (0.052) (0.063)
GARCH 0.597*** 0.080** −0.759 −0.502
(0.032) (0.040) (0.470) (0.423)
TGARCH 0.596*** 0.081** 0.882* 0.477
(0.032) (0.040) (0.460) (0.415)
ARMA 0.942*** 0.275*** −0.092 0.969***
(0.048) (0.057) (0.159) (0.158)
ARFIMA 0.884*** 0.167*** 0.808*** −0.721***
(0.041) (0.061) (0.183) (0.190)
HARQ‐F‐J 2.520*** 0.155 0.094 −0.134
(0.138) (0.177) (0.290) (0.261)
Constant −0.017*** 0.045*** 0.045*** 0.042*** 0.039*** 0.026*** −0.018*** −0.018*** −0.020*** −0.016*** −0.019*** 0.034*** −0.030***
(0.005) (0.005) (0.005) (0.005) (0.004) (0.006) (0.005) (0.005) (0.005) (0.005) (0.006) (0.006) (0.007)
2
Adjusted‐R 0.407 0.232 0.232 0.258 0.291 0.229 0.408 0.408 0.419 0.410 0.407 0.295 0.429
MAE 0.3661 0.4110 0.4104 0.4045 0.3956 0.4162 0.3651 0.3652 0.3609 0.3644 0.3661 0.3939 0.3550
RMSE 0.4871 0.5544 0.5544 0.5448 0.5325 0.5551 0.4862 0.4862 0.4820 0.4854 0.4869 0.5301 0.4767

Note: This table presents the estimation results of the univariate regression (10) and the encompassing regression (13) with the 10‐day forecasting horizon. Standard errors are in parentheses. *, **, and *** denote the
significance levels of 10%, 5%, and 1%, respectively.
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TABLE 9 15‐day forecasting horizon

Dependent variable: 15‐day ahead realized volatility

(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13)
IV 0.917*** 0.860*** 0.855*** 0.838*** 0.871*** 0.886*** 0.961***
(0.033) (0.047) (0.047) (0.044) (0.054) (0.048) (0.060)
GARCH 0.566*** 0.066* −0.848* −0.801**
(0.031) (0.039) (0.437) (0.394)
TGARCH 0.567*** 0.072* 1.049** 0.832**
(0.031) (0.039) (0.430) (0.388)
ARMA 0.936*** 0.170*** −0.343** 0.669***
(0.054) (0.061) (0.152) (0.151)
ARFIMA 0.851*** 0.067 0.801*** −0.632***
(0.042) (0.062) (0.168) (0.176)
HARQ‐F‐J 3.007*** 0.195 0.389 0.342
(0.170) (0.212) (0.354) (0.319)
Constant −0.007 0.061*** 0.061*** 0.058*** 0.055*** 0.039*** −0.008 −0.008 −0.010* −0.006 −0.009 0.048*** 0.028***
(0.006) (0.006) (0.006) (0.006) (0.005) (0.007) (0.006) (0.006) (0.006) (0.006) (0.007) (0.008) (0.008)
Adjusted R2 0.405 0.228 0.230 0.213 0.266 0.219 0.406 0.406 0.408 0.405 0.405 0.282 0.416
MAE 0.4327 0.4954 0.4942 0.4973 0.4829 0.5009 0.4322 0.4322 0.4320 0.4331 0.4330 0.4776 0.4264
RMSE 0.5586 0.6362 0.6354 0.6425 0.6203 0.6398 0.5579 0.5577 0.5567 0.5583 0.5584 0.6123 0.5522

Note: This table presents the estimation results of the univariate regression (10) and the encompassing regression (13) with the 15‐day forecasting horizon. Standard errors are in parentheses. *, **, and *** denote the
significance levels of 10%, 5%, and 1%, respectively.
Abbreviations: ARMA, autoregressive–moving‐average; GARCH, generalized autoregressive conditional heteroskedasticity; HARQ‐F‐J, HAR model with quarticity and jump; MAE, mean absolute error; RMSE, root
mean squared error.
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15
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T A B L E 10 Flexible forecasting horizons

Dependent variable: Realized volatility

(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13)
IV 0.586*** 0.443*** 0.438*** 0.526*** 0.502*** 0.544*** 0.445***
(0.001) (0.002) (0.002) (0.002) (0.002) (0.002) (0.002)
GARCH 0.533*** 0.237*** −2.777*** −1.914***
(0.001) (0.002) (0.032) (0.031)
TGARCH 0.537*** 0.245*** 3.123*** 2.155***
(0.001) (0.002) (0.032) (0.031)
ARMA 0.834*** 0.250*** −0.050*** 0.236***
(0.003) (0.003) (0.006) (0.006)
ARFIMA 0.792*** 0.204*** 0.409*** −0.162***
(0.002) (0.003) (0.007) (0.007)
HARQ‐F‐J 0.720*** 0.121*** 0.024*** −0.004
(0.003) (0.003) (0.005) (0.004)
Constant 0.260*** 0.287*** 0.284*** 0.335*** 0.303*** 0.208*** 0.172*** 0.170*** 0.185*** 0.216*** 0.204*** 0.225*** 0.146***
(0.001) (0.001) (0.001) (0.002) (0.001) (0.002) (0.001) (0.001) (0.002) (0.001) (0.002) (0.002) (0.002)
Adjusted‐R2 0.296 0.221 0.226 0.130 0.192 0.143 0.322 0.324 0.305 0.303 0.299 0.257 0.333
MAE 2.0609 2.1433 2.1351 2.2783 2.2662 2.2432 2.0101 2.0072 2.0520 2.0701 2.0584 2.1182 1.9813
RMSE 2.6521 2.7902 2.7819 2.9483 2.8423 2.9268 2.6022 2.5990 2.6358 2.6398 2.6476 2.7246 2.5813

Note: This table presents the estimation results of the univariate regression (10) and the encompassing regression (13) with flexible forecasting horizons. For each trade, the forecasting horizon is the number of days to
expiration of the option. Standard errors are in parentheses. *, **, and *** denote the significance levels of 10%, 5%, and 1%, respectively.
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HOANG AND BAUR | 17

A comparison between univariate and bivariate regressions shows that the inclusion of IV significantly improves
the goodness‐of‐fit of all univariate models (higher adjusted‐R2 and lower MAE and RMSE), and the coefficient of IV is
statistically significant. The results are similar when we incorporate all forecasts into multivariate regressions (columns
(12)–(13)). The findings are generally consistent with the main analysis when we fix the forecasting horizons at 1 day
and 7 days, that is, IV contains information about future volatility that is not a subset of the model‐based forecasts.

5 | CONCLUDING REMARKS

Options are an important asset class and thus may play a significant role for BTC investors. This paper uses BTC options
trading data to examine the information content in options to forecast volatility. The study is based on the largest options
exchange Deribit which dominates the regulated Chicago Mercantile Exchange and all other existing options exchanges in
terms of trading volume.
We use the options trades to calculate IV and analyze the forecasting power of this volatility measure in comparison
to GARCH, ARMA, and HAR‐type models. Although IV generally underperforms parametric time‐series models
(especially ARMA‐type models) in forecasting 1‐day ahead volatility, it is superior in long‐term prediction consistent
with the findings in Martens and Zein (2004) and Pong et al. (2004). We explain this conditional forecasting accuracy
with the fact that time‐series models such as ARMA and GARCH are designed to forecast at short‐term horizons
whereas IV captures long‐term expectations and is thus better suited to forecast long‐term volatility. Furthermore, IV
contains incremental information about future volatility that is not available in any model‐based forecasts. This finding
highlights the role of the options market in providing important information.
Future research could study the influence of options trading on the volatility of the underlying and the role of regulation.
The CME introduced options trading only recently and trading volumes are relatively low. However, this may well change in
the future allowing an analysis of two (or more) competing options exchanges. Such an analysis may also reveal whether
investors prefer a regulated exchange such as the CME over an unregulated exchange such as Deribit.

ACKNOWLEDGMEN TS
The authors would like to thank the editor (Robert Webb) and anonymous referee for their valuable suggestions and
comments which helped improve the paper. Lai T. Hoang gratefully acknowledges the financial support provided by
the Australian Government Research Training Program.

DATA AVAILABILITY STATEMENT

The data that support the findings of this study have been obtained from the fol‐lowing public sources as of February 2020:
(a) Deribit's API for options trades (the API documentation can be found at http://docs.deribit.com/#market‐data), (b)
http://api.bitcoincharts.com/v1/csv for intraday bitcoin prices, (c) http://finance.yahoo.com/quote/%5EIRX for the U.S. 3‐
month T‐bills rate. The data can be downloaded from the UWA data repository at https://doi.org/10.26182/5eabbcb4fbf28. R
codes that are used to replicate results in this studyare available at http://tinyurl.com/deribitoptions.

ORCID
Lai T. Hoang http://orcid.org/0000-0002-4147-4611
Dirk G. Baur http://orcid.org/0000-0002-0185-0424

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How to cite this article: Hoang LT, Baur DG. Forecasting bitcoin volatility: Evidence from the options market.
J Futures Markets. 2020;1–19. https://doi.org/10.1002/fut.22144
HOANG AND BAUR | 19

APPENDIX A

F I G U R E A 1 daily options trading

volume across exchanges. Source: https://
skew.com [Color figure can be viewed at
wileyonlinelibrary.com]

APPENDIX B

T A B L E B1 A sample of trades recorded in the deribit database

Timestamp Price (BTC) Instrument name Index price (USD) Direction Amount (BTC)
2019–12‐08 01:26:14 0.02 BTC‐13DEC19–7500‐C 7434.27 Buy 0.20
2019–12‐08 01:28:06 0.01 BTC‐13DEC19–7750‐C 7432.12 Sell 0.30
2019–12‐08 01:28:37 0.00 BTC‐13DEC19–8250‐C 7433.51 Sell 0.10
2019–12‐08 01:37:49 0.01 BTC‐13DEC19–7250‐P 7441.11 Sell 0.30
2019–12‐08 01:38:10 0.01 BTC‐13DEC19–7000‐P 7439.01 Sell 1.00
2019–12‐08 01:42:47 0.03 BTC‐20DEC19–7500‐C 7447.02 Buy 1.00
2019–12‐08 01:48:11 0.01 BTC‐27DEC19–6000‐P 7441.62 Buy 10.00
2019–12‐08 01:52:23 0.01 BTC‐13DEC19–7250‐P 7448.36 Sell 0.20
2019–12‐08 01:53:38 0.00 BTC‐13DEC19–8250‐C 7449.64 Sell 0.10
2019–12‐08 01:59:00 0.01 BTC‐13DEC19–7250‐P 7447.96 Buy 0.80
2019–12‐08 02:05:11 0.20 BTC‐27DEC19–6000‐C 7438.81 Sell 2.00
2019–12‐08 02:06:32 0.00 BTC‐13DEC19–9000‐C 7441.94 Sell 0.10
2019–12‐08 02:18:47 0.06 BTC‐13DEC19–7750‐P 7433.36 Buy 1.00
2019–12‐08 02:19:40 0.03 BTC‐13DEC19–7500‐P 7433.55 Buy 0.20
2019–12‐08 02:19:40 0.03 BTC‐13DEC19–7500‐P 7433.55 Buy 0.20
2019–12‐08 02:21:48 0.04 BTC‐20DEC19–7500‐P 7423.06 Buy 5.00
2019–12‐08 02:21:50 0.13 BTC‐26JUN20–10000‐C 7418.81 Sell 0.10
2019–12‐08 02:22:05 0.00 BTC‐13DEC19–8250‐C 7418.29 Sell 0.10
2019–12‐08 02:22:14 0.03 BTC‐13DEC19–7500‐P 7416.52 Buy 1.10
2019–12‐08 02:22:17 0.04 BTC‐20DEC19–7500‐P 7414.53 Buy 0.50