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Modeling Bitcoin price volatility: long memory vs Markov switching

Abstract

The aim of this paper is to identify the best model to describe the volatility dynamics of Bitcoin prices for the turbulent period 2013–2020. We use two types of models namely the long memory model and Markov switching model. Empirical results point out the presence of long memory in the volatility dynamics of the Bitcoin market. In addition, the FIGARCH model that explicitly accounts for long memory outperforms all other models in modeling the volatility of the Bitcoin prices. The finding has several implications for portfolio diversification, hedging strategy and Value at Risk assessment. Such analysis guides international investors towards the optimal portfolio diversification and the effective hedging instruments.

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Notes

  1. 1.

    https://coinmarketcap.com/.

  2. 2.

    See e.g. Guesmi et al. (2019), Shahzad et al. (2019), Demir et al. (2020) and Gil-Alana et al. (2020).

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Correspondence to Walid Chkili.

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Chkili, W. Modeling Bitcoin price volatility: long memory vs Markov switching. Eurasian Econ Rev 11, 433–448 (2021). https://doi.org/10.1007/s40822-021-00180-7

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Keywords

  • Bitcoin
  • Volatility
  • GARCH model
  • Long memory
  • Markov switching

JEL Classification

  • C22
  • C24
  • C58
  • G11