Modeling prices from speculative markets: bursting bubbles or deflating balloons?

Christian Hafner (), Andrew Harvey () and Linqi Wang ()
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Christian Hafner: Université catholique de Louvain, LIDAM/ISBA, Belgium
Andrew Harvey: University of Cambridge
Linqi Wang: University of Cambridge

No 2025008, LIDAM Discussion Papers ISBA from Université catholique de Louvain, Institute of Statistics, Biostatistics and Actuarial Sciences (ISBA)

Abstract: Speculative markets may be characterized by sharp falls after a slow build up. Sometimes the converse happens. We suggest a number of mechanisms that are able to produce this kind of behaviour and we demonstrate their plausibility by simulation. The models are then fitted to daily data on Bitcoin. In constructing these models we show that it is essential to take account of volatility and non-normality. We also investigate the possibility of a dynamic tail index. The conclusion, at least for Bitcoin, is that speculative markets are more likely to behave like balloons than bubbles. In other words, there is rapid inflation followed by a slow decline.

Keywords: Bitcoin; explosive models; score-driven models; volatility; tail index (search for similar items in EconPapers)
JEL-codes: C22 C58 G17 (search for similar items in EconPapers)
Pages: 40
Date: 2025-04-15
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