On a regime switching illiquid high volatile prediction model for cryptocurrencies

Research output: Contribution to journalArticlepeer-review

1 Citation (Scopus)

Abstract

Purpose: The current paper proposes a prediction model for a cryptocurrency that encompasses three properties observed in the markets for cryptocurrencies—namely high volatility, illiquidity, and regime shifts. As far as the authors’ knowledge extends, this paper is the first attempt to introduce a stochastic differential equation (SDE) for pricing cryptocurrencies while explicitly integrating the mentioned three significant stylized facts. Design/methodology/approach: Cryptocurrencies are increasingly utilized by investors and financial institutions worldwide as an alternative means of exchange. To the authors’ best knowledge, there is no SDE in the literature that can be used for representing and evaluating the data-generating process for the price of a cryptocurrency. Findings: By using Ito calculus, the authors provide a solution for the suggested SDE along with mathematical proof. Numerical simulations are performed and compared to the real data, which seems to capture the dynamics of the price path of two main cryptocurrencies in the real markets. Originality/value: The stochastic differential model that is introduced and solved in this article is expected to be useful for the pricing of cryptocurrencies in situations of high volatility combined with structural changes and illiquidity. These attributes are apparent in the real markets for cryptocurrencies; therefore, accounting explicitly for these underlying characteristics is a necessary condition for accurate evaluation of cryptocurrencies.

Original languageEnglish
Pages (from-to)485-498
Number of pages14
JournalJournal of Economic Studies
Volume51
Issue number2
DOIs
Publication statusPublished - Feb 16 2024

Keywords

  • Continuous time Markov chain
  • Cryptocurrencies
  • High volatility
  • Illiquid
  • Regime switching
  • Stochastic modeling

ASJC Scopus subject areas

  • General Economics,Econometrics and Finance

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