Exogenous Drivers of Bitcoin and Cryptocurrency Volatility – A Mixed Data Sampling Approach to Forecasting

19 Pages Posted: 27 Jun 2018 Last revised: 5 Aug 2019

See all articles by Thomas Walther

Thomas Walther

University of St. Gallen - School of Finance

Tony Klein

Queen's University Belfast - Queen's Management School

Elie Bouri

Université Saint Esprit de Kaslik (USEK)

Date Written: June 19, 2019

Abstract

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 and the Global Financial Stress Index outperform all other economic and financial drivers under investigation. Only the average forecast combination results in lower 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. In addition, we show that the Global Real Economic Activity provides superior volatility predictions for both, bull and bear markets.

Keywords: Bitcoin, Cryptocurrencies, GARCH, Mixed Data Sampling, Volatility

JEL Classification: C10, C58, G11

Suggested Citation

Walther, Thomas and Klein, Tony and Bouri, Elie, Exogenous Drivers of Bitcoin and Cryptocurrency Volatility – A Mixed Data Sampling Approach to Forecasting (June 19, 2019). University of St.Gallen, School of Finance Research Paper No. 2018/19; QMS Research Paper 2018/02. Available at SSRN: https://ssrn.com/abstract=3192474 or http://dx.doi.org/10.2139/ssrn.3192474

Thomas Walther (Contact Author)

University of St. Gallen - School of Finance ( email )

Unterer Graben 21
St.Gallen, CH-9000
Switzerland

Tony Klein

Queen's University Belfast - Queen's Management School ( email )

Riddel Hall
185 Stranmillis Road
Belfast, BT9 5EE
United Kingdom

Elie Bouri

Université Saint Esprit de Kaslik (USEK) ( email )

KASLIK
Lebanon

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