Abstract
This paper aims to enrich the understanding and modelling strategies for cryptocurrency markets by investigating major cryptocurrencies’ returns determinants and forecast their returns. To handle model uncertainty when modelling cryptocurrencies, we conduct model selection for an autoregressive distributed lag (ARDL) model using several popular penalized least squares estimators to explain the cryptocurrencies’ returns. We further introduce a novel model averaging approach or the shrinkage Mallows model averaging (SMMA) estimator for forecasting. First, we find that the returns for most cryptocurrencies are sensitive to volatilities from major financial markets. The returns are also prone to the changes in gold prices and the Forex market’s current and lagged information. Then, when forecasting cryptocurrencies’ returns, we further find that an ARDL(p,q) model estimated by the SMMA estimator outperforms the competing estimators and models out-of-sample.
Highlights
Ever since the advent of the first digital currency, Bitcoin (BTC), which was created under the anonymous identity Nakamoto (2008), cryptocurrencies are becoming increasingly popular among investors as they provide an alternative investment strategy to conventional financial assets
Do we aim to uncover the relationship between the cryptocurrency and the macroeconomic conditions, but we explore the dynamic interactions between the cryptocurrency market and the financial market, foreign exchange (Forex) market, commodity market and precious metals market
We examine the determinants of the returns for major cryptocurrencies by applying the autoregressive distributed lag (ARDL) model with model selection via penalized least squares estimators
Summary
Ever since the advent of the first digital currency, Bitcoin (BTC), which was created under the anonymous identity Nakamoto (2008), cryptocurrencies are becoming increasingly popular among investors as they provide an alternative investment strategy to conventional financial assets. The cryptocurrencies are highly sought after as they stem from a peer-to-peer structure that allows efficiency, security and profitability. As they are becoming more widely accepted by investors, it has cemented their legitimacy as a medium of exchange and a means to liquidity for businesses, financial institutions and the general public alike. Do we aim to uncover the relationship between the cryptocurrency and the macroeconomic conditions, but we explore the dynamic interactions between the cryptocurrency market and the financial market, foreign exchange (Forex) market, commodity market and precious metals market This helps potential investors to gain more insights into the leading cryptocurrencies
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