Forecasting Ethereum’s volatility: an expansive approach using HAR models and structural breaks

Abstract

AbstractCryptocurrencies have become a popular investment option and the Ethereum has become a mainstream cryptocurrency because of the additional functionality that can be accomplished with the backing of the powerful Ethereum network compared to Bitcoin. The high volatility of Ethereum offers both profits and risks, making it crucial to improve the forecasting ability for its price volatility. The results of this study could be useful for investors and policymakers who are interested in understanding and managing the risks associated with investing in Ethereum. Several studies have explored similar topics using heterogeneous autoregressive (HAR) models for cryptocurrencies, but this paper offers a more expansive approach. This paper employs five-minute high-frequency data to construct 4 HAR models to predict the volatility of Ethereum, taking into account the impact of structural breaks, Bitcoin, SP500 and VIX. The model that considers all factors outperforms other models for out-of-sample predictions for the 1-week forecasting. Due to the nature of the Ethereum price, the HAR-RV model has achieved a perfect fit in 1-day and 1-month forecasting. Therefore, other models have a very small improvement in fitness and prediction accuracy. This paper contributes to the understanding of Ethereum’s volatility and its impact on the cryptocurrency market.

Keywords

• HAR model
• VIX
• volatility forecasting
• structural breaks
• cryptocurrency
• David McMillan, University of Stirling, Stirling, UK