Cryptocurrency Forecasting: More Evidence of the Meese-Rogoff Puzzle

Abstract

This paper tests the random walk hypothesis in the cryptocurrency market. Based on the well-known Meese–Rogoff puzzle, we evaluate whether cryptocurrency returns are predictable or not. For this purpose, we conduct in-sample and out-of-sample analyses to examine the forecasting power of our model built with autoregressive components and lagged returns of Bitcoin, compared with the random walk benchmark. To this end, we considered the 13 major cryptocurrencies between 2018 and 2022. Our results indicate that our models significantly outperform the random walk benchmark. In particular, cryptocurrencies tend to be far more persistent than regular exchange rates, and Bitcoin (BTC) seems to improve the predictive accuracy of our models for some cryptocurrencies. Furthermore, while the predictive performance is time varying, we find predictive ability in different regimes before and during the pandemic crisis. We think that these results are helpful to policymakers and investors because they open a new perspective on cryptocurrency investing strategies and regulations to improve financial stability.

Predicción de tipos de cambio utilizando monedas MILA con Google Trends

“…Dicho en palabras sencillas, estas variables debieran "explicar" una porción de la varianza del tipo de cambio. Sin embargo, como señalan Magner y Hardy (2022): "[…] es bien sabido que modelos económicos (de tipo de cambio) no producen mejores pronósticos que un simple paseo aleatorio". Muchos artículos siguen básicamente esta misma línea argumental, tales como Meese y Rogoff (1983, Cheung et al (2005), Engel et al (2007), Lyons (2012), Melvin et al (2013), por nombrar solo algunos.…”

Investigating the Co-Volatility Spillover Effects between Cryptocurrencies and Currencies at Different Natures of Risk Events

“…Some researchers and regulators suggest that cryptocurrency more closely resembles a speculative commodity than a currency (Baek and Elbeck 2015;Yermack 2015;Fry and Cheah 2016;Baur et al 2018a;Stensås et al 2019), and they find that a large majority of users treat their cryptocurrencies as an alternative investment instrument rather than as an alternative transaction system due to high volatility in the market (Glaser et al 2014;Mikhaylov 2020). Moreover, the returns on financial assets usually exhibit a sizable unpredictable component, while Magner and Hardy (2022) report the evidence of predictability in cryptocurrencies and inferred that the cryptocurrency market exhibits arbitrage opportunities.…”