Sequential Learning of Cryptocurrency Volatility Dynamics: Evidence Based on a Stochastic Volatility Model with Jumps in Returns and Volatility

Jing-Zhi Huang (), Zhijian James Huang () and Li Xu
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Jing-Zhi Huang: Smeal College of Business, Pennsylvania State University, University Park, PA 16802, USA
Zhijian James Huang: Saunders College of Business, Rochester Institute of Technology, LOW-3340, Rochester, NY 14623, USA
Li Xu: Department of Finance, School of Business, New Jersey City University, Jersey City, NJ 07311, USA
Authors registered in the RePEc Author Service: Jingzhi Huang

Quarterly Journal of Finance (QJF), 2021, vol. 11, issue 02, 1-37

Abstract: This paper studies the dynamics of cryptocurrency volatility using a stochastic volatility model with simultaneous and correlated jumps in returns and volatility. We estimate the model using an efficient sequential learning algorithm that allows for learning about multiple unknown model parameters simultaneously, with daily data on four popular cryptocurrencies. We find that these cryptocurrencies have quite different volatility dynamics. In particular, they exhibit different return-volatility relationships: While Ethereum and Litecoin show a negative relationship, Chainlink displays a positive one and interestingly, Bitcoin’s one changes from negative to positive in June 2016. We also provide evidence that the sequential learning algorithm helps better detect large jumps in the cryptocurrency market in real time. Overall, incorporating volatility jumps helps better capture the dynamic behavior of highly volatile cryptocurrencies.

Keywords: Bitcoin; cryptocurrency; sequential learning; stochastic volatility; simultaneous and correlated jumps; leverage effect; particle filters; sequential Monte Carlo; Bayesian analysis (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (1)

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DOI: 10.1142/S2010139221500105

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