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An empirical test for bubbles in cryptocurrency markets

Author

Listed:
  • George A. Waters

    (Illinois State University)

  • Thuy Bui

    (Rutgers Business School)

Abstract

In an asset market without bubbles, meaning the strong efficient markets hypothesis is satisfied, the price and dividend should be cointegrated. However, standard unit root tests have low power against a class of Periodically Collapsing Rational Bubbles introduced by (Evans, Am Econ Rev 81:922–930, 1991), which are an intuitive model of speculative behavior. The cryptocurrency markets for bitcoin, ethereum, and ripple do not have dividends, so the tests are conducted using five different proxies for fundamentals. In most cases the price and fundamental data are integrated of order one, according to a minimum LM test for unit roots that allows for breaks. Using a robust test for cointegration that controls for the skewness and excess kurtosis that could arise with such bubbles, one cannot reject the presence of Period Collapsing Rational Bubbles in any of the cryptocurrency markets. The distribution of such tests is non-standard, so significance levels are determined with Monte Carlo experiments.

Suggested Citation

  • George A. Waters & Thuy Bui, 2022. "An empirical test for bubbles in cryptocurrency markets," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 46(1), pages 207-219, January.
    • Handle: RePEc:spr:jecfin:v:46:y:2022:i:1:d:10.1007_s12197-021-09561-9
    DOI: 10.1007/s12197-021-09561-9
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Cryptocurrency; Bitcoin; Ethereum; Ripple; Bubble; Cointegration; Residuals Augmented Dickey Fuller test;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • G1 - Financial Economics - - General Financial Markets

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