APPLYING THE LOCAL MARTINGALE THEORY OF BUBBLES TO CRYPTOCURRENCIES

Soon Hyeok Choi and Robert Jarrow ()

International Journal of Theoretical and Applied Finance (IJTAF), 2022, vol. 25, issue 03, 1-25

Abstract: Cryptocurrencies provide a natural setting to test for the existence of price bubbles using the local martingale theory of bubbles because cryptocurrencies have no cash flows. Using a robust statistical algorithm, we test for price bubbles in eight cryptocurrencies, Bitcoin (BTC), Litecoin (LTC), Ethereum (ETH), Ripple (XRP), Bitcoin Cash (BCH), EOS (EOS), Monero (XMR), and Zcash (ZEC), from 1 January 2019 to 17 July 2019. The statistical test first estimates the cryptocurrencies’ volatilities as a function of the price level. Then, these estimates are extrapolated over the positive real line using power functions. Finally, these power functions underly a sequence of hypothesis tests for price bubbles that control for both Type I and Type II errors. Five of the eight currencies (BTC, BCH, EOS, XMR, ZEC) exhibit price bubbles, LTC does not, and the evidence for ETH and XRP is inconclusive. The paper provides strong evidence for the prevalence of bubbles in cryptocurrencies.

Keywords: Local martingale; cryptocurrency; foreign currency; price bubble; bubble detection; modified convex hull algorithm (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:wsi:ijtafx:v:25:y:2022:i:03:n:s0219024922500133

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DOI: 10.1142/S0219024922500133

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