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A Simple Approach to Assess if a Financial ¡°Bubble¡± is Present: The Case of Bitcoin

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  • Vitor M. A. da Fonseca
  • Manuel A. R. da Fonseca

Abstract

This article¡¯s goal is to evaluate if the recent price behavior of Bitcoin can be characterized as a financial market ¡°bubble¡±. To deal with this assessment, we adopt a statistical definition of a ¡°bubble¡± derived from the efficient market hypothesis and we propose a simple method to test this proposition, based on the time-series model known as random walk. We analyze the data available for Bitcoin prices, together with an asset selected as benchmark, and perform statistical tests derived from simple regression equations. The main conclusion is that there is consistent evidence that that Bitcoin follows the pattern of a financial ¡°bubble¡± ¨C at least, such pattern is more evident in the case of Bitcoin than in the stock index used as benchmark.

Suggested Citation

  • Vitor M. A. da Fonseca & Manuel A. R. da Fonseca, 2019. "A Simple Approach to Assess if a Financial ¡°Bubble¡± is Present: The Case of Bitcoin," Applied Economics and Finance, Redfame publishing, vol. 6(4), pages 1-10, July.
    • Handle: RePEc:rfa:aefjnl:v:6:y:2019:i:4:p:1-10
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    References listed on IDEAS

    as
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    5. Douglas D. Evanoff & George G. Kaufman & Anastasios G. Malliaris, 2012. "Asset price bubbles: What are the causes, consequences, and public policy options?," Chicago Fed Letter, Federal Reserve Bank of Chicago, issue Nov.
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Bitcoin; ¡°bubbles¡± in financial markets; time series models; statistical regression analysis;
    All these keywords.

    JEL classification:

    • R00 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General - - - General
    • Z0 - Other Special Topics - - General

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