An empirical test for bubbles in cryptocurrency markets

George Waters and Thuy Bui ()
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Thuy Bui: Rutgers Business School

Journal of Economics and Finance, 2022, vol. 46, issue 1, No 9, 207-219

Abstract: Abstract In an asset market without bubbles, meaning the strong efficient markets hypothesis is satisfied, the price and dividend should be cointegrated. However, standard unit root tests have low power against a class of Periodically Collapsing Rational Bubbles introduced by (Evans, Am Econ Rev 81:922–930, 1991), which are an intuitive model of speculative behavior. The cryptocurrency markets for bitcoin, ethereum, and ripple do not have dividends, so the tests are conducted using five different proxies for fundamentals. In most cases the price and fundamental data are integrated of order one, according to a minimum LM test for unit roots that allows for breaks. Using a robust test for cointegration that controls for the skewness and excess kurtosis that could arise with such bubbles, one cannot reject the presence of Period Collapsing Rational Bubbles in any of the cryptocurrency markets. The distribution of such tests is non-standard, so significance levels are determined with Monte Carlo experiments.

Keywords: Cryptocurrency; Bitcoin; Ethereum; Ripple; Bubble; Cointegration; Residuals Augmented Dickey Fuller test (search for similar items in EconPapers)
JEL-codes: C22 G1 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (1)

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DOI: 10.1007/s12197-021-09561-9

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