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Author(s): Pratas, T. E.
Ramos, F. R.
Rubio, L. J.
Date: 2023
Title: Forecasting bitcoin volatility: Exploring the potential of deep learning
Journal title: Eurasian Economic Review
Volume: 13
Pages: 285 - 305
Reference: Pratas, T. E., Ramos, F. R., & Rubio, L. J. (2023). Forecasting bitcoin volatility: Exploring the potential of deep learning. Eurasian Economic Review, 13, 285-305.
ISSN: 1309-422X
DOI (Digital Object Identifier): 10.1007/s40822-023-00232-0
Keywords: Cryptocurrencies
Deep learning
Prediction error
Abstract: This study aims to evaluate forecasting properties of classic methodologies (ARCH and GARCH models) in comparison with deep learning methodologies (MLP, RNN, and LSTM architectures) for predicting Bitcoin's volatility. As a new asset class with unique characteristics, Bitcoin's high volatility and structural breaks make forecasting challenging. Based on 2753 observations from 08-09-2014 to 01-05-2022, this study focuses on Bitcoin logarithmic returns. Results show that deep learning methodologies have advantages in terms of forecast quality, although significant computational costs are required. Although both MLP and RNN models produce smoother forecasts with less fluctuation, they fail to capture large spikes. The LSTM architecture, on the other hand, reacts strongly to such movements and tries to adjust its forecast accordingly. To compare forecasting accuracy at different horizons MAPE, MAE metrics are used. Diebold-Mariano tests were conducted to compare the forecast, confirming the superiority of deep learning methodologies. Overall, this study suggests that deep learning methodologies could provide a promising tool for forecasting Bitcoin returns (and therefore volatility), especially for short-term horizons.
Peerreviewed: yes
Access type: Open Access
Appears in Collections:DE-RI - Artigos em revistas internacionais com arbitragem científica

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