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Detecting bubbles in Bitcoin price dynamics via market exuberance

Author

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  • Alessandra Cretarola

    (University of Perugia)

  • Gianna Figà-Talamanca

    (University of Perugia)

Abstract

Empirical evidence suggests the presence of bubble effects on Bitcoin price dynamics during its lifetime, starting in 2009. Previous research, mostly empirical, focused on statistical tests in order to detect a bubble behavior at some point in time. Few exceptions suggested specific time series models capable to describe such phenomena. We contribute this stream of literature by considering a continuous time stochastic model for Bitcoin dynamics, depending on a market attention factor, which is proven to boost in a bubble under suitable conditions. Here, we define a bubble following the theory of mathematical bubbles introduced by Philip E. Protter and coauthors. Specifically, we prove that the presence of a bubble is related to the correlation between the market attention factor on Bitcoin and Bitcoin returns being above a threshold, i.e. when marked attention affects Bitcoin prices and converse, creating a vicious loop. This phenomenon has been labelled market exuberance by Robert J. Shiller, recipient of the 2013 Nobel prize in Economic Sciences. The model is fitted on historical data of Bitcoin prices, by considering either the total trading volume or the Google Search Volume Index as proxies for the attention measure. According to our numerical results, a bubble effect is evidenced in the early years of Bitcoin introduction, namely 2012–2013, as well as in the recent race of 2017.

Suggested Citation

  • Alessandra Cretarola & Gianna Figà-Talamanca, 2021. "Detecting bubbles in Bitcoin price dynamics via market exuberance," Annals of Operations Research, Springer, vol. 299(1), pages 459-479, April.
    • Handle: RePEc:spr:annopr:v:299:y:2021:i:1:d:10.1007_s10479-019-03321-z
    DOI: 10.1007/s10479-019-03321-z
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    References listed on IDEAS

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    Cited by:

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    5. Junichi Hirukawa & Sangyeol Lee, 2021. "Asymptotic properties of mildly explosive processes with locally stationary disturbance," Metrika: International Journal for Theoretical and Applied Statistics, Springer, vol. 84(4), pages 511-534, May.

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    More about this item

    Keywords

    Bitcoin; Bubble; Local martingale; Market exuberance;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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