An Alpha-Stable Approach to Modelling Highly Speculative Assets and Cryptocurrencies

13 Pages Posted: 16 Mar 2020

See all articles by Taurai Muvunza

Taurai Muvunza

Tsinghua University - Tsinghua-Berkeley Shenzhen Institute

Date Written: January 20, 2020

Abstract

We investigate the behaviour of cryptocurrencies' return data. Using return data for bitcoin, ethereum and ripple which account for over 70% of the cyrptocurrency market, we demonstrate that α-stable distribution models highly speculative cryptocurrencies more robustly compared to other heavy tailed distributions that are used in financial econometrics. We find that the Maximum Likelihood Method proposed by DuMouchel (1971) produces estimates that fit the cryptocurrency return data much better than the quantile based approach of McCulloch (1986) and sample characteristic method by Koutrouvelis (1980). The empirical results show that the leptokurtic feature presented in cryptocurrency return data can be captured by an α-stable distribution. This papers covers predominant literature in cryptocurrencies and stable distributions.

Keywords: cryptocurrency, bitcoin, α-stable distribution, heavy tails

JEL Classification: C02, C55, G12

Suggested Citation

Muvunza, Taurai, An Alpha-Stable Approach to Modelling Highly Speculative Assets and Cryptocurrencies (January 20, 2020). Available at SSRN: https://ssrn.com/abstract=3505859 or http://dx.doi.org/10.2139/ssrn.3505859

Taurai Muvunza (Contact Author)

Tsinghua University - Tsinghua-Berkeley Shenzhen Institute ( email )

China

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