Forecasting the Volatility of Bitcoin: The Importance of Jumps and Structural Breaks

European Financial Management, Forthcoming

40 Pages Posted: 17 Sep 2019 Last revised: 15 Dec 2019

See all articles by Dehua Shen

Dehua Shen

Tianjin University - College of Management and Economics

Andrew Urquhart

ICMA Centre, Henley Business School

Pengfei Wang

Tianjin University - College of Management and Economics

Date Written: September 7, 2019

Abstract

This paper studies the volatility of Bitcoin and determines the importance of jumps and structural breaks in forecasting volatility. Using high-frequency data, we perform a model-free decomposition of realized variance into its continuous and discontinuous components, positive and negative semivariances, signed jumps and leverage components. We show the importance of this decomposition in the in-sample regressions using eighteen competing heterogeneous autoregressive (HAR) models. In the out-of-sample setting, we find that the HARQ-F-J model is the superior model, indicating the importance of the temporal variation and squared jump components at different time horizons. We also show that the HAR models with structural breaks outperform models without structural breaks across all forecasting horizons. Our results are robust to an alternative jump estimator and estimation method.

Keywords: Volatility Forecasting, Bitcoin, Realized Volatility, Jumps, Structural Breaks

JEL Classification: C53, G15, G17

Suggested Citation

Shen, Dehua and Urquhart, Andrew and Wang, Pengfei, Forecasting the Volatility of Bitcoin: The Importance of Jumps and Structural Breaks (September 7, 2019). European Financial Management, Forthcoming. Available at SSRN: https://ssrn.com/abstract=3449756 or http://dx.doi.org/10.2139/ssrn.3449756

Dehua Shen

Tianjin University - College of Management and Economics ( email )

NO.92 Weijin Road
Nankai District
Tianjin, 300072
China

Andrew Urquhart (Contact Author)

ICMA Centre, Henley Business School ( email )

University of Reading
Whiteknights
Reading, Berkshire RG6 6BA
United Kingdom

Pengfei Wang

Tianjin University - College of Management and Economics ( email )

NO.92 Weijin Road
Nankai District
Tianjin, 300072
China

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