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- Title
A hidden Markov model to detect regime changes in cryptoasset markets.
- Authors
Giudici, Paolo; Abu Hashish, Iman
- Abstract
The objective of this work is to understand the dynamics of cryptocurrency prices. Specifically, how prices switch between different regimes, going from "bull" to "stable" and "bear" times. For this purpose, we propose a hidden Markov model that aims at explaining the evolution of Bitcoin prices through different, unobserved states. The implementation of the proposed model includes a likelihood ratio test that allows to compare models with different states and with different covariance structures. Our empirical findings show that the time movements of Bitcoin prices across different exchange markets are well‐described by the proposed model. In particular, a parsimonious model with a diagonal covariance matrix leads to better predictions, compared with a model with a full covariance matrix.
- Subjects
HIDDEN Markov models; COVARIANCE matrices; FOREIGN exchange market; LIKELIHOOD ratio tests; PARSIMONIOUS models; FORECASTING
- Publication
Quality & Reliability Engineering International, 2020, Vol 36, Issue 6, p2057
- ISSN
0748-8017
- Publication type
Article
- DOI
10.1002/qre.2673