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Testing for bubbles in cryptocurrencies with time-varying volatility

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  • HAFNER Christian,

    (CORE and ISBA, UCLouvain)

Abstract

The recent evolution of cryptocurrencies has been characterized by bubble-like behavior and extreme volatility. While it is difficult to assess an intrinsic value to a specific cryptocurrency, one can employ recently proposed bubble tests that rely on recursive applications of classical unit root tests. This paper extends this approach to the case where volatility is time varying, assuming a deterministic long-run component that may take into account a decrease of unconditional volatility when the cryptocurrency matures with a higher market dissemination. Volatility also includes a stochastic short-run component to capture volatility clustering. The wild bootstrap is shown to correctly adjust the size properties of the bubble test, which retains good power properties. In an empirical application using eleven of the largest cryptocurrencies and the CRIX index, the general evidence in favor of bubbles is confirmed, but much less pronounced than under constant volatility.

Suggested Citation

  • HAFNER Christian,, 2018. "Testing for bubbles in cryptocurrencies with time-varying volatility," LIDAM Discussion Papers CORE 2018019, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    • Handle: RePEc:cor:louvco:2018019
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    JEL classification:

    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • C43 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Index Numbers and Aggregation
    • Z11 - Other Special Topics - - Cultural Economics - - - Economics of the Arts and Literature

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