Time series analysis of Cryptocurrency returns and volatilities
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Time series analysis of Cryptocurrency returns and volatilities Rama K. Malladi 1
& Prakash
L. Dheeriya 1
Accepted: 7 September 2020/ # Academy of Economics and Finance 2020
Abstract There is a significant interest in the growth and development of cryptocurrencies, the most notable ones being Bitcoin and Ripple. Global trading in these cryptocurrencies has led to highly speculative and “bubble-like” price movements. Since these cryptocurrencies trade like stocks, provide a feasible alternative to gold and appreciate during uncertain times, it can be hypothesized that their prices are partly determined by the global stock indices, gold prices, and fear gauges such as the VIX and the US Economic Policy Uncertainty Index. In this paper, we test this hypothesis by conducting a time series analysis of returns and volatilities of Bitcoin and of Ripple. We use the Autoregressive-moving-average model with exogenous inputs model (ARMAX), Generalized Autoregressive Conditionally Heteroscedastic (GARCH) model, Vector Autoregression (VAR) model, and Granger causality tests to determine linkages between returns and volatilities of Bitcoin and of Ripple. We find that the Bitcoin crash of 2018 could have been explained using these time series methods. We also find that returns of global stock markets and of gold do not have a causal effect on Bitcoin returns, but we do find returns on Ripple have a causal effect on Bitcoin prices. Keywords Asset management . Alternative investments . Digital currency .
Cryptocurrency . Bitcoin, ripple, BTC, XRP, economic uncertainty index
Rama K. Malladi is with California State University, Dominguez Hills, in California. He is a CFA Charter holder and a past president of the CFA Society Los Angeles. Prakash L. Dheeriya is with California State University, Dominguez Hills, in California. He is a past chair of the Department of Finance.
* Rama K. Malladi [email protected] Prakash L. Dheeriya [email protected]
1
Department of Accounting, Finance, and Economics, College of Business and Public Policy (CBAPP), California State University, Dominguez Hills, 1000, E Victoria Street, SBS C 315, Carson, CA 90747, USA
Journal of Economics and Finance
JEL Classification G11 . G17
1 Introduction Bitcoin (largest ’cryptocurrency’, abbreviated as BTC) is the first decentralized peer-topeer payment network that is powered by its users with no central authority or middlemen.1 It has had an astounding rise in popularity in recent times. Many believe that it is the currency of the future, and the rise in its price has been attributed to its limited supply. Nakamoto (2008) is said to be the pioneer behind this cryptocurrency. New transactions are announced on a computer network by BTC users connected via the internet, and these transactions are verified by network nodes. The transactions are then recorded in a public distributed ledger called the Blockchain. BTC is one of the many digital currencies that uses Blockchain as its underlying platform. BTCs are awarded to miners or users who offer their c
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