A Stochastic Analysis of the Effect of Trading Parameters on the Stability of the Financial Markets Using a Bayesian Approach

Rolando Rubilar-Torrealba (), Karime Chahuán-Jiménez and Hanns de la Fuente-Mella
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Rolando Rubilar-Torrealba: Universidad de La Frontera, Facultad de Ciencias Jurídicas y Empresariales, Departamento de Administración y Economía, Temuco 4811230, Chile
Karime Chahuán-Jiménez: Centro de Investigación en Negocios y Gestión Empresarial, Escuela de Auditoría, Facultad de Ciencias Económicas y Administrativas, Universidad de Valparaíso, Valparaíso 2362735, Chile
Hanns de la Fuente-Mella: Instituto de Estadística, Facultad de Ciencias, Pontificia Universidad Católica de Valparaíso, Valparaíso 2340031, Chile

Mathematics, 2023, vol. 11, issue 11, 1-14

Abstract: The purpose of this study was to identify and measure the impact of the different effects of entropy states over the high-frequency trade of the cryptocurrency market, especially in Bitcoin, using and selecting optimal parameters of the Bayesian approach, specifically through approximate Bayesian computation (ABC). ABC corresponds to a class of computational methods rooted in Bayesian statistics that could be used to estimate the posterior distributions of model parameters. For this research, ABC was applied to estimate the daily prices of the Bitcoin cryptocurrency from May 2013 to December 2021. The findings suggest that the behaviour of the parameters for our tested trading algorithms, in which sudden jumps are observed, can be interpreted as changes in states of the generated time series. Additionally, it is possible to identify and model the effects of the COVID-19 pandemic on the series analysed in the research. Finally, the main contribution of this research is that we have characterised the relationship between entropy and the evolution of parameters defining the optimal selection of trading algorithms in the financial industry.

Keywords: cryptocurrencies; econometric models; stochastic processes; Bayesian analysis; market efficiency; entropy (search for similar items in EconPapers)
JEL-codes: C (search for similar items in EconPapers)
Date: 2023
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