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The role of uncertainty index in forecasting volatility of Bitcoin: Fresh evidence from GARCH-MIDAS approach

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  • Xia, Yufei
  • Sang, Chong
  • He, Lingyun
  • Wang, Ziyao

Abstract

We shed light on the role of Economic Policy Uncertainty (EPU) and Cryptocurrency Uncertainty (UCRY) indices in forecasting Bitcoin volatility. The empirical results of in-sample estimations demonstrate that the global EPU index and UCRY indices exhibit significantly negative and positive effects on long-term Bitcoin volatility, respectively. Moreover, the out-of-sample validation reveals that One-Side Asymmetric GARCH-MIDAS with UCRY price index is the best-performing model and forecasting models incorporating the UCRY indices significantly outperform models with global and national EPUs in out-of-sample forecasting. Considering its scarce application, UCRY indices become a promising data source in guiding Bitcoin trading behaviors.

Suggested Citation

  • Xia, Yufei & Sang, Chong & He, Lingyun & Wang, Ziyao, 2023. "The role of uncertainty index in forecasting volatility of Bitcoin: Fresh evidence from GARCH-MIDAS approach," Finance Research Letters, Elsevier, vol. 52(C).
    • Handle: RePEc:eee:finlet:v:52:y:2023:i:c:s1544612322005682
    DOI: 10.1016/j.frl.2022.103391
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