Sentiment-induced bubbles in the cryptocurrency market

Chen, C. Y.-H. and Hafner, C. M. (2019) Sentiment-induced bubbles in the cryptocurrency market. Journal of Risk and Financial Management, 12(2), 53. (doi:10.3390/jrfm12020053)

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Abstract

Cryptocurrencies lack clear measures of fundamental values and are often associated with speculative bubbles. This paper introduces a new way of testing for speculative bubbles based on StockTwits sentiment, which is used as the transition variable in a smooth transition autoregression. The model allows for conditional heteroskedasticity and fat tails of the conditional distribution of the error term, and volatility may depend on the constructed sentiment index. We apply the model to the CRIX index, for which several bubble periods are identified. The detected locally explosive price dynamics, given the specified bubble regime controlled by a smooth transition function, are more akin to the notion of speculative bubble that is driven by exuberant sentiment. Furthermore, we find that volatility increases as the sentiment index decreases, which is analogous to the commonly called leverage effect.

Item Type:Articles
Additional Information:This research was funded by grant ARC 18/23-089 of the Belgian government and the Deutsche Forschungsgemeinschaft through IRTG 1792 “High Dimensional Non Stationary Time Series”.
Keywords:Cryptocurrencies, speculative bubbles, sentiment, smooth transition.
Status:Published
Refereed:Yes
Glasgow Author(s) Enlighten ID:Chen, Professor Cathy Yi-Hsuan
Authors: Chen, C. Y.-H., and Hafner, C. M.
College/School:College of Social Sciences > Adam Smith Business School > Accounting and Finance
Journal Name:Journal of Risk and Financial Management
Publisher:MDPI
ISSN:1911-8066
ISSN (Online):1911-8074
Copyright Holders:Copyright © 2019 The Authors
First Published:First published in Journal of Risk and Financial Management 12(2):53
Publisher Policy:Reproduced under a Creative Commons License

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