On a regime switching illiquid high volatile prediction model for cryptocurrencies
ISSN: 0144-3585
Article publication date: 11 July 2023
Issue publication date: 16 February 2024
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.
Keywords
Acknowledgements
Previous versions of this paper were presented in the following conferences: (1) 10th Asian Management Research and Case Conference, 2022, Al Ain, UAE. It obtained the best paper award. (2) The 6th Equal Opportunities Conference “Sustainable Leadership and Technology Innovation Management”, 2023, Manama, Bahrain. The authors are grateful to the participants of the conferences for their comments. The authors also received constructive remarks from the editor of this journal Mohsen Bahmani-Oskooee and two anonymous reviewers that improved the paper significantly. The usual disclaimer applies, however.
Citation
El-Khatib, Y. and Hatemi-J, A. (2024), "On a regime switching illiquid high volatile prediction model for cryptocurrencies", Journal of Economic Studies, Vol. 51 No. 2, pp. 485-498. https://doi.org/10.1108/JES-03-2023-0134
Publisher
:Emerald Publishing Limited
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