Financial Fear Index in the Digital Financial Assets Market

Abstract

The relevance of the research topic is due to the increasing role of non-traditional financial instruments that contribute to financial instability. Therefore, various indicators are required to reflect the situation in the digital financial assets market, the volatility quotes, and the level of investor confidence. The aim of the study is to develop and test on empirical data a generalized indicator of financial instability (financial fear index) in the digital financial assets market. The novelty of the research lies in the adaptation of the classic model of building the volatility index to the cryptocurrency market.The authors use statistical methods for collecting and processing data, analyzing time series, weighing, designing economic indicators. The paper summarizes the results of modern research on the correlation between digitalization and financial instability. The authors conclude that at certain short periods of 2020 the ruble-dollar volatility was comparable or even higher than the ruble-bitcoin one. In addition, there is much less fear and uncertainty in the cryptocurrency market today than there was at the end of 2018. The main result of the study is the financial fear index model based on the method of calculating the weighted average option price of the underlying asset and hedging of price risks. The model has been tested using data on the bid and ask prices of cryptocurrencies at a specific point in time. Estimates have been obtained indicating the growing instability in the digital financial asset market. The authors offer recommendations regarding the index threshold values, which indicate the level of investors’ fear.