Returns, volatility and the cryptocurrency bubble of 2017–18

Cross, Jamie L., Huo, Chenghan, and Trinh, Kelly (2021) Returns, volatility and the cryptocurrency bubble of 2017–18. Economic Modelling, 104. 105643.

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Research on cryptocurrencies has focused on price and volatility formation in isolation, however knowledge about their interdependence is important for risk management and asset allocation. We investigate the existence and nature of such a relationship in four commonly traded cryptocurrencies: Bitcoin, Ethereum, Litecoin and Ripple, during the cryptocurrency bubble of 2017–18. Using a generalized asset pricing model, we find evidence of a risk premium effect in Litecoin and Ripple during the boom of 2017, and that adverse news effects were an important driver of the cryptocurrency crash of 2018 in all four cryptocurrencies. In an out-of-sample forecasting exercise, we find that allowing for stochastic volatility and a heavy tailed distribution provides more accurate return and volatility forecasts compared to a random walk benchmark. This suggests that cryptocurrency markets were not weak-form efficient during this period.

Item ID: 69408
Item Type: Article (Research - C1)
ISSN: 1873-6122
Keywords: Cryptocurrencies; Returns and volatility; Stochastic volatility; Time-varying parameter model; Forecasting
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Copyright Information: © 2021 Elsevier B.V. All rights reserved.
Date Deposited: 21 Sep 2021 01:30
FoR Codes: 38 ECONOMICS > 3802 Econometrics > 380202 Econometric and statistical methods @ 60%
38 ECONOMICS > 3802 Econometrics > 380205 Time-series analysis @ 40%
SEO Codes: 15 ECONOMIC FRAMEWORK > 1502 Macroeconomics > 150299 Macroeconomics not elsewhere classified @ 100%
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