Exogenous Drivers of Bitcoin and Cryptocurrency Volatility – A Mixed Data Sampling Approach to Forecasting
26 Pages Posted: 27 Jun 2018 Last revised: 19 Sep 2019
Date Written: September 1, 2019
We apply the GARCH-MIDAS framework to forecast the daily, weekly, and monthly volatility of five highly capitalized Cryptocurrencies (Bitcoin, Etherium, Litecoin, Ripple, and Stellar) as well as the Cryptocurrency index CRIX. Based on the prediction quality, we determine the most important exogenous drivers of volatility in Cryptocurrency markets. We find that the Global Real Economic Activity outperforms all other economic and financial drivers under investigation. We also show that the Global Real Economic Activity provides superior volatility predictions for both, bull and bear markets. In addition, the average forecast combination results in low loss functions. This indicates that the information content of exogenous factors is time-varying and the model averaging approach diversifies the impact of single drivers.
Keywords: Bitcoin, Cryptocurrencies, GARCH, Mixed Data Sampling, Volatility
JEL Classification: C10, C58, G11
Suggested Citation: Suggested Citation