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A permutation entropy analysis of Bitcoin volatility

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  • Obanya, Praise Otito
  • Seitshiro, Modisane
  • Olivier, Carel Petrus
  • Verster, Tanja

Abstract

Cryptocurrencies are widely regarded as volatile and less predictable assets by financial participants. The behaviour and dynamics of Bitcoin’s daily volatility, obtained by fitting GARCH models, are investigated for a period of 8 years using permutation entropy which is represented by the variable H for calculations. The best fitting GARCH models selected are the FIGARCH(1,0.7,1) and SGARCH(1,1) models based on maximum likelihood estimation, Akaike Information Criterion and Bayesian Information Criterion. Simulated volatilities are also obtained from the best fitting GARCH models using their respective parameters, to confirm how well the models fit. The results obtained show that the H values of Bitcoin are generally low and that the dynamics of Bitcoin’s volatility is quite predictable, as Bitcoin’s volatility is most likely to decline over time than increase or have an alternating movement. Also, the simulated volatilities show good agreement with the real-world volatility, confirming the models as good fits.

Suggested Citation

  • Obanya, Praise Otito & Seitshiro, Modisane & Olivier, Carel Petrus & Verster, Tanja, 2024. "A permutation entropy analysis of Bitcoin volatility," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 638(C).
    • Handle: RePEc:eee:phsmap:v:638:y:2024:i:c:s0378437124001171
    DOI: 10.1016/j.physa.2024.129609
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