Hidden Markov model with stochastic volatility for estimating bitcoin price volatility

Abstract

The stochastic volatility (SV) model is one of the main methods of modeling time-varying volatility.In particular, SV model is actively used in estimation and prediction of financial market volatility and option pricing.This paper attempts to model the time-varying volatility of the bitcoin market price using SV model.Hidden Markov model (HMM) is combined with the SV model to capture characteristics of regime switching of the market.The HMM is useful for recognizing patterns of time series to divide the regime of market volatility.This study estimated the volatility of bitcoin by using data from Upbit, a cryptocurrency trading site, and analyzed it by dividing the volatility regime of the market to improve the performance of the SV model.The MCMC technique is used to estimate the parameters of the SV model, and the performance of the model is verified through evaluation criteria such as MAPE and MSE.