Cryptocurrency Market Volatility Forecasting

Abstract

Although cryptocurrencies are catching the fancy of investors for various benefits such as decentralization, low transaction costs, and inflation hedging, their extreme volatility is sometimes keeping many away. Consequently, modeling and forecasting cryptocurrency market volatility are essential to investors’ investment decisions and risk management. However, most previous studies have been limited to Bitcoin volatility, disregarding cryptocurrency market performance as a whole. This study estimates realized volatility of cryptocurrency market with a variety of algorithms employing a portfolio-style technique. After comparison, LSTM networks surpass the conventional GARCH-type models; meanwhile, the hybrid GARCH neural network models perform the worst. This study provides an impetus for a significant number of academics interested in the extreme volatility of cryptocurrencies. Additionally, it illustrates that more sophisticated models may not always lead to better predictive performance.