On extreme value theory in the presence of technical trend: pre and post Covid-19 analysis of cryptocurrency markets

Saji Thazhungal Govindan Nair

Journal of Financial Economic Policy, 2021, vol. 14, issue 4, 533-561

Abstract: Purpose - Research on price extremes and overreactions as potential violations of market efficiency has a long tradition in investment literature. Arguably, very few studies to date have addressed this issue in cryptocurrencies trading. The purpose of this paper is to consider the extreme value modelling for forecasting COVID-19 effects on cryptocoin markets. Additionally, this paper examines the importance of technical trading indicators in predicting the extreme price behaviour of cryptocurrencies. Design/methodology/approach - This paper decomposes the daily-time series returns of four cryptocurrency returns into potential maximum gains (PMGs) and potential maximum losses (PMLs) at first and then tests their lead–lag relations under an econometric framework. This paper also investigates the non-random properties of cryptocoins by computing the incremental explanatory power of PML–PMG modelling with technical trading indicators controlled. Besides, this paper executes an event study to identify significant changes caused by COVID-19-related events, which is capable of analysing the cryptocoin market overreactions. Findings - The findings of this paper produce the evidence of both market overreactions and trend persistence in the potential gains and losses from coins trading. Extreme price behaviour explains volatility and price trends in crypto markets before and after the outbreak of a pandemic that substantiate the non-random walk behaviour of crypto returns. The presence of technical trading indicators as control variables in the extreme value regressions significantly improves the predictive power of models. COVID-19 crisis affects the market efficiency of cryptocurrencies that improves the usefulness of extreme value predictions with technical analysis. Research limitations/implications - This paper strongly supports for the robustness of technical trading strategies in cryptocurrency markets. However, the “beast is moving quick” and uncertainty as to the new normalcy about the post-COVID-19 world puts constraint on making best predictions. Practical implications - The paper contributes substantially to our understanding of the pricing efficiency of cryptocurrency markets after the COVID-19 outbreak. The findings of continuing return predictability and price volatility during COVID-19 show that profitable investment opportunities for cryptocoin traders are prevailing in pandemic times. Originality/value - The paper is unique to understand extreme return reversals behaviour of cryptocurrency markets regarding events related to COVID-19 breakout.

Keywords: GARCH; VAR; Cryptocurrency; Technical trading; Price extremes (search for similar items in EconPapers)
Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:eme:jfeppp:jfep-09-2021-0242

DOI: 10.1108/JFEP-09-2021-0242

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