Forecasting Cryptocurrencies Log-Returns: a LASSO-VAR and Sentiment Approach

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See all articles by Federico D'Amario

Federico D'Amario

Department of Economics and Law, Sapienza University of Rome

Milos Ciganovic

Department of Economics and Law, Sapienza University of Rome

Date Written: September 22, 2022

Abstract

Cryptocurrencies have become a trendy topic recently, primarily due to their disruptive potential and reports of unprecedented returns. In addition, academics increasingly acknowledge the predictive power of Social Media in many fields and, more specifically, for financial markets and economics. In this paper, we leverage the predictive power of Twitter and Reddit sentiment together with Google Trends indexes and volume to forecast the log returns of ten cryptocurrencies. Specifically, we consider Bitcoin, Ethereum, Tether, BinanceCoin, Litecoin, EnjinCoin, Horizen, Namecoin, Peercoin, and Feathercoin. We evaluate the performance of LASSO-VAR using daily data from January 2018 to January 2022. In a 30 days recursive forecast, we can retrieve the correct direction of the actual series more than 50% of the time. We compare this result with the main benchmarks, and we see a 10% improvement in Mean Directional Accuracy (MDA). The use of sentiment and attention variables as predictors increase significantly the forecast accuracy in terms of MDA but not in terms of Root Mean Squared Errors. We perform a Granger causality test using a
post-double LASSO selection for high-dimensional VARs. Results show no “causality” from Social Media sentiment to cryptocurrencies returns

Keywords: Cryptocurrencies, Time series analysis, Sentiment analysis, Natural Language Processing

JEL Classification: C32, C53, C55, G17

Suggested Citation

D'Amario, Federico and Ciganovic, Milos, Forecasting Cryptocurrencies Log-Returns: a LASSO-VAR and Sentiment Approach (September 22, 2022). Available at SSRN: https://ssrn.com/abstract=

Federico D'Amario (Contact Author)

Department of Economics and Law, Sapienza University of Rome ( email )

Via del Castro Laurenziano 9
Rome, IA Rome 00161
Italy

Milos Ciganovic

Department of Economics and Law, Sapienza University of Rome ( email )

Via del Castro Laurenziano 9
Rome, IA Rome 00161
Italy

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