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Regime switching forecasting for cryptocurrencies

Author

Listed:
  • Ilyas Agakishiev

    (Humboldt Universität zu Berlin)

  • Wolfgang Karl Härdle

    (Humboldt Universität zu Berlin)

  • Denis Becker

    (NTNU Business School)

  • Xiaorui Zuo

    (Shaw Foundation)

Abstract

There are many ways to model complex time series. The simplest approach is to increase the complexity, and thus, the flexibility of the model, for the entire time series. As an example, one could use a neural network. Another solution would be to change the parameters of a model dependent on the “state” or “regime” of the time series. A typical example here would be the Hidden Markov model (HMM). This paper combines the two concepts to create a Reinforcement Learning (RL) model that adds variables that depend on the state of the time series. To test the concept, the RL model is used with cryptocurrency data to determine the share to invest into the cryptocurrency index CRIX in order to maximize wealth. The results have shown that cryptocurrency metadata is useful as supplementary data for analysis of the respective prices. The Reinforcement learning model with regimes shows potential for investment management, but comes with some caveats.

Suggested Citation

  • Ilyas Agakishiev & Wolfgang Karl Härdle & Denis Becker & Xiaorui Zuo, 2025. "Regime switching forecasting for cryptocurrencies," Digital Finance, Springer, vol. 7(1), pages 107-131, March.
    • Handle: RePEc:spr:digfin:v:7:y:2025:i:1:d:10.1007_s42521-024-00123-2
    DOI: 10.1007/s42521-024-00123-2
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    References listed on IDEAS

    as
    1. Dietmar Maringer & Tikesh Ramtohul, 2012. "Regime-switching recurrent reinforcement learning for investment decision making," Computational Management Science, Springer, vol. 9(1), pages 89-107, February.
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    3. Amir Mosavi & Pedram Ghamisi & Yaser Faghan & Puhong Duan, 2020. "Comprehensive Review of Deep Reinforcement Learning Methods and Applications in Economics," Papers 2004.01509, arXiv.org.
    4. repec:hum:wpaper:sfb649dp2015-048 is not listed on IDEAS
    5. Trimborn, Simon & Härdle, Wolfgang Karl, 2018. "CRIX an Index for cryptocurrencies," Journal of Empirical Finance, Elsevier, vol. 49(C), pages 107-122.
    6. Vincenzo Candila, 2021. "Multivariate Analysis of Cryptocurrencies," Econometrics, MDPI, vol. 9(3), pages 1-17, July.
    7. Härdle, Wolfgang Karl & Trimborn, Simon, 2015. "CRIX or evaluating blockchain based currencies," SFB 649 Discussion Papers 2015-048, Humboldt University Berlin, Collaborative Research Center 649: Economic Risk.
    8. Karim, Muhammad Mahmudul & Ali, Md Hakim & Yarovaya, Larisa & Uddin, Md Hamid & Hammoudeh, Shawkat, 2023. "Return-volatility relationships in cryptocurrency markets: Evidence from asymmetric quantiles and non-linear ARDL approach," International Review of Financial Analysis, Elsevier, vol. 90(C).
    9. Mosavi, Amir & Faghan, Yaser & Ghamisi, Pedram & Duan, Puhong & Ardabili, Sina Faizollahzadeh & Hassan, Salwana & Band, Shahab S., 2020. "Comprehensive Review of Deep Reinforcement Learning Methods and Applications in Economics," OSF Preprints jrc58, Center for Open Science.
    10. Amirhosein Mosavi & Yaser Faghan & Pedram Ghamisi & Puhong Duan & Sina Faizollahzadeh Ardabili & Ely Salwana & Shahab S. Band, 2020. "Comprehensive Review of Deep Reinforcement Learning Methods and Applications in Economics," Mathematics, MDPI, vol. 8(10), pages 1-42, September.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Regime switching; Machine learning; Crypto currencies; Reinforcement learning; FinTech;
    All these keywords.

    JEL classification:

    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • C87 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs - - - Econometric Software
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques

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