Modeling Cryptocurrency (Bitcoin) using Vector Autoregressive (Var) Model

Abstract

A digital currency in which encryption techniques are used to regulate the generation of units of currency and verify the transfer of funds, operating independently of a central bank. Therefore, Bitcoin is a form of digital currency that was designed by Satoshi Nakamoto (an unknown author of Bitcoin white paper 2008) and since then it has able to generate a considerable attention from investors due to its decentralized characteristics and the technology (block-chain) behind it. Bitcoin is a form of digital peer-to-peer currency system where transactions take place without a central bank. The transactions are verified by the nodes of the network and recorded in the Blockchain. Since the popularization of Bitcoin, this technology has caught attention of several technology companies who started to do research on the applications and opportunities of this technology. In this paper, an attempt has been made to capture the time varying variance of most prominent Cryptocurrency Bitcoin with world’s top traded currencies such as USD, GBP, Euro, Yen and CHF. In order to realise the stated objectives the researchers have collected the data from Prowess and Yahoo finance database from September 2013 till March 2018. In the first phase the collected data has been for normality and stationarity. Bitcoin was modelled for GARCH and EGARCH tests to capture the time varying volatility and leverage effect. Later the Johansen cointegration test has been conducted to find out the existence of cointegration between the top global currencies with Bitcoin. In the last phase the VECM has been run to capture the both long run and short relationship between Bitcoin and top five traded currencies. In the last phase Variance Decomposition has been run to capture the variance explained by the prominent global currencies on Bitcoin. Both USD and GBP share long run relationship with Bitcoin. Finally, the results have been compared with the possible evidence.