Forecasting Cryptocurrency Returns

Abstract

This paper studies two cryptocurrencies and finds that their prices can be estimated or forecasted better than their returns because returns being ratios of prices, do not always exhibit the economic relationship that may exist between two price series. However, average returns use multiple prices in their ratios that capture the economic behavior of the price series. Further, the forecasting performance of traditional preceding return models are compared with those of preceding average return models and the latter are found to generally give better results in terms of Root Mean Square Error (RMSE) and average return on investments (ARoIs).