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Forecasting Bitcoin realized volatility by exploiting measurement error under model uncertainty

Yue Qiu, Zongrun Wang, Tian Xie and Xinyu Zhang

Journal of Empirical Finance, 2021, vol. 62, issue C, 179-201

Abstract: Modeling Bitcoin realized volatility by the heterogeneous autoregressive model is subject to substantial model specification uncertainty in practice. To circumvent the lag specification uncertainty, we introduce a new model averaging coefficient estimator with the mean squared error of the coefficient to be minimized. We show that the averaged coefficient vector has a root-n consistency with n being the sample size and propose using a double bootstrap to provide inference. Monte Carlo simulation results demonstrate reliability of the proposed method. The in-sample application shows that adjustment for measurement errors by HARQ-type models is necessary. The model averaging estimator has higher in-sample explanatory power with more significant predictors. The out-of-sample outcomes reveal that the forecast horizon plays a key role at determining the effectiveness of signed realized variance for predicting the Bitcoin volatility. Finally, the model averaging HARQ-type models demonstrate superior out-of-sample performance for both short and long forecast horizons.

Keywords: HARQ; Model averaging; Bitcoin; Realized volatility (search for similar items in EconPapers)
JEL-codes: C52 C53 G12 G17 (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1016/j.jempfin.2021.03.003

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Journal of Empirical Finance is currently edited by R. T. Baillie, F. C. Palm, Th. J. Vermaelen and C. C. P. Wolff

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