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Do cryptocurrency prices camouflage latent economic effects? A Bayesian hidden Markov approach
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Koki, Constandina, Leonardos, Stefanos and Piliouras, Georgios (2019) Do cryptocurrency prices camouflage latent economic effects? A Bayesian hidden Markov approach. In: The 3rd Annual Decentralized Conference on Blockchain and Cryptocurrency, Athens, Greece, 30 Oct -1 Nov 2019. Published in: Proceedings, 28 (1). doi:10.3390/proceedings2019028005 ISSN 2504-3900.
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Official URL: http://dx.doi.org/10.3390/proceedings2019028005
Abstract
With Bitcoin, Ether and more than 2000 cryptocurrencies already forming a multi-billion dollar market, a proper understanding of their statistical and financial properties still remains elusive. Traditional economic theories do not explain their characteristics and standard financial models fail to capture their statistic and econometric attributes such as their extreme variability and heteroskedasticity. Motivated by these findings, we study Bitcoin and Ether prices via a Non-Homogeneous Pólya Gamma Hidden Markov (NHPG) model that has been shown to outperform its counterparts in conventional financial data. The NHPG algorithm has good in-sample performance and identifies both linear and non-linear effects of the predictors. Our results indicate that all price series are heteroskedastic with frequent changes between the two states of the underlying Markov process. In a somewhat unexpected result, the Bitcoin and Ether prices, although correlated, are significantly affected by different variables. We compare long term to short term Bitcoin data and find that significant covariates may change over time. Limitations of the current approach—as expressed by the large number of significant predictors and the poor out-of-sample predictions—back earlier findings that cryptocurrencies are unlike any other financial asset and hence, that their understanding requires novel tools and ideas.
Item Type: | Conference Item (Paper) | ||||||
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Divisions: | Faculty of Science, Engineering and Medicine > Science > Mathematics | ||||||
Journal or Publication Title: | Proceedings | ||||||
Publisher: | MDPI | ||||||
ISSN: | 2504-3900 | ||||||
Official Date: | 21 October 2019 | ||||||
Dates: |
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Volume: | 28 | ||||||
Number: | 1 | ||||||
Article Number: | 5 | ||||||
DOI: | 10.3390/proceedings2019028005 | ||||||
Status: | Peer Reviewed | ||||||
Publication Status: | Published | ||||||
Access rights to Published version: | Open Access (Creative Commons) | ||||||
Date of first compliant deposit: | 19 July 2021 | ||||||
Date of first compliant Open Access: | 20 July 2021 | ||||||
Conference Paper Type: | Paper | ||||||
Title of Event: | The 3rd Annual Decentralized Conference on Blockchain and Cryptocurrency | ||||||
Type of Event: | Conference | ||||||
Location of Event: | Athens, Greece | ||||||
Date(s) of Event: | 30 Oct -1 Nov 2019 |
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