Dynamic volatility modelling of Bitcoin using time-varying transition probability Markov-switching GARCH model

Chia-Yen Tan, You-Beng Koh, Kok-Haur Ng and Kooi-Huat Ng
Authors registered in the RePEc Author Service: Ng Kok Haur

The North American Journal of Economics and Finance, 2021, vol. 56, issue C

Abstract: Bitcoin (BTC), as the dominant cryptocurrency, has attracted tremendous attention lately due to its excessive volatility. This paper proposes the time-varying transition probability Markov-switching GARCH (TV-MSGARCH) models incorporated with BTC daily trading volume and daily Google searches singly and jointly as exogenous variables to model the volatility dynamics of BTC return series. Extensive comparisons are carried out to evaluate the modelling performances of the proposed model with the benchmark models such as GARCH, GJRGARCH, threshold GARCH, constant transition probability MSGARCH and MSGJRGARCH. Results reveal that the TV-MSGARCH models with skewed and fat-tailed distribution predominate other models for the in-sample model fitting based on Akaike information criterion and other benchmark criteria. Furthermore, it is found that the TV-MSGARCH model with BTC daily trading volume and student-t error distribution offers the best out-of-sample forecast evaluated based on the mean square error loss function using Hansen’s model confidence set. Filardo’s weighted transition probabilities are also computed and the results show the existence of time-varying effect on transition probabilities. Lastly, different levels of long and short positions of value-at-risk and the expected shortfall forecasts based on MSGARCH, MSGJRGARCH and TV-MSGARCH models are also examined.

Keywords: Bitcoin; Volatility; Time-varying transition probability; Markov-switching; GARCH model (search for similar items in EconPapers)
JEL-codes: C01 C58 G10 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecofin:v:56:y:2021:i:c:s1062940821000164

DOI: 10.1016/j.najef.2021.101377

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