A Machine Learning Based Regulatory Risk Index for Cryptocurrencies

Xinwen Ni, Wolfgang Karl Härdle and Taojun Xie

No 2020-013, IRTG 1792 Discussion Papers from Humboldt University of Berlin, International Research Training Group 1792 "High Dimensional Nonstationary Time Series"

Abstract: Cryptocurrencies’ values often respond aggressively to major policy changes, but none of the existing indices informs on the market risks associated with regulatory changes. In this paper, we quantify the risks originating from new regulations on FinTech and cryptocurrencies (CCs), and analyse their impact on market dynamics. Specifically, a Cryptocurrency Regulatory Risk IndeX (CRRIX) is constructed based on policy-related news coverage frequency. The unlabeled news data are collected from the top online CC news platforms and further classified using a Latent Dirichlet Allocation model and Hellinger distance. Our results show that the machine-learning-based CRRIX successfully captures major policy-changing moments. The movements for both the VCRIX, a market volatility index, and the CRRIX are synchronous, meaning that the CRRIX could be helpful for all participants in the cryptocurrency market. The algorithms and Python code are available for research purposes on www.quantlet.de.

Keywords: Cryptocurrency; Regulatory Risk; Index; LDA; News Classification (search for similar items in EconPapers)
JEL-codes: C45 G11 G18 (search for similar items in EconPapers)
Date: 2020
New Economics Papers: this item is included in nep-big, nep-cmp, nep-mon, nep-pay and nep-rmg
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Citations: View citations in EconPapers (3)

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Related works:
Working Paper: A Machine Learning Based Regulatory Risk Index for Cryptocurrencies (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:irtgdp:2020013

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