Variance structure of the Bitcoin currency

• Thesis title in Czech: Struktura volatility digitální měny Bitcoin
• Thesis title in English: Variance structure of the Bitcoin currency
• Key words: Bitcoin, Digitální měna, Realizovaná variace, Realizovaná volatilita, Dvojmocná variace, Vysokofrekvenční data, Skoky
• English key words: Bitcoin, Digital Currency, Realized Variance, Realized Volatility, Bipower Variation, High Frequency Data, Jumps
• Academic year of topic announcement: 2013/2014
• Thesis type: Bachelor's thesis
• Thesis language: angličtina
• Department: Institute of Economic Studies (23-IES)
• Supervisor: prof. PhDr. Ladislav Krištoufek, Ph.D.
• Author: hidden - assigned by the advisor
• Date of registration: 30.04.2014
• Date of assignment: 13.05.2014
• Date and time of defence: 17.06.2015 08:00
• Venue of defence: IES
• Date of electronic submission: 13.05.2015
• Date of proceeded defence: 17.06.2015
• Opponents: PhDr. Mgr. Jiří Skuhrovec, Ph.D.

Preliminary scope of work

Charakteristika práce
Ekonometrie finanční volatility v poslední době nabývá velkého zájmu. I přesto je ale počet studií týkajících se volatility ceny bitcoinu velice omezený. Hlavním důvodem je fakt, že Bitcoin byl představen v roce 2009, z čehož vyplývá, že tato digitální měna je stále velice novým jevem. S tím jak roste počet bitcoinů v oběhu, roste i potřeba detailní analýzy Bitcoinu.
V teoretické části popíšeme výhody i potenciální rizika spojená s Bitcoinem a pokusíme se vysvětlit, jak tato kryptoměna funguje. V empirické části budeme analyzovat volatilitu ceny bitcoinu a také význam cenových skoků v celkové variaci Bitcoinu. Výsledky poté budou srovnány s volatilitou jiných měn a finančních aktiv.

Hypotézy
1. Are jumps in the Bitcoin total variation stronger than jumps in total variation of other currencies and stocks?
2. Is the variance of Bitcoin higher than the variance of other currencies and stocks?
3. Do the characteristics of jumps of Bitcoin get closer to the ones of other currencies and stocks in time?

Metodologie
Pro oddělení skokové části variace od části spojité využijeme realizovanou variaci a dvojmocnou variaci.

Osnova
1. Introduction
2. Bitcoin
3. Literature review
4. Methodology
5. Results
6. Conclusion

Základní literatura
1. Barndorff-Nielsen, O. E. & N. Shephard (2002): "Econometric analysis of realized volatility and its use in estimating stochastic volatility models." Journal of the Royal Statistical Society: Series B (Statistical Methodology) 64(2): pp. 253-280.
2. Barndorff-Nielsen, O. E. & N. Shephard (2002): "Econometrics of Testing for Jumps in Financial Economics Using Bipower Variation." Journal of Financial Econometrics 4(1): pp. 1-30.
3. Barndorff-Nielsen, O. E. & N. Shephard (2004): "Power and Bipower Variation with Stochastic Volatility and Jumps." Journal of Financial Econometrics 2(1): pp. 1-37.
4. McAleer, M. & M. C. Medeiros (2008): "Realized Volatility: A Review." Econometric Reviews 27(1-3): pp. 10-45.
5. Ron, D. & A. Shamir (2013): "Quantitative Analysis of the Full Bitcoin Transaction Graph." Financial Cryptography and Data Security, Lecture Notes in Computer Science. Springer Berlin Heidelberg: pp. 6-24.

Preliminary scope of work in English

Topic characteristics
The econometrics of financial volatility has gained a great interest recently. Nevertheless, the number of studies related to the topic of Bitcoin exchange rate volatility remains very limited. The main reason for this is that Bitcoin was introduced in 2009 which implies that it is still a very recent phenomenon. As the number of bitcoins in the circulation grows, the importance of a detailed Bitcoin analysis grows as well.
In the theoretical part of the thesis, we would like to examine the benefits and potential risks of Bitcoin and try to explain how this cryptocurrency works. The aim of the empirical part is to analyze Bitcoin exchange rate volatility and the role of jumps in the Bitcoin total variation. The results will then be assessed and compared with volatility of other currencies and financial assets.

Hypotheses
1. Are jumps in the Bitcoin total variation stronger than jumps in total variation of other currencies and stocks?
2. Is the variance of Bitcoin higher than the variance of other currencies and stocks?
3. Do the characteristics of jumps of Bitcoin get closer to the ones of other currencies and stocks in time?

Methodology
To analyze Bitcoin exchange rate volatility, common methods which are based on realized variation measures will be used.
We will apply primarily realized variance (sum of squared returns) and bipower variation to separate the Bitcoin total variation into its continuous and jump components.

Outline
1. Introduction
2. Bitcoin
3. Literature review
4. Methodology
5. Results
6. Conclusion

Core bibliography
1. Barndorff-Nielsen, O. E. & N. Shephard (2002): "Econometric analysis of realized volatility and its use in estimating stochastic volatility models." Journal of the Royal Statistical Society: Series B (Statistical Methodology) 64(2): pp. 253-280.
2. Barndorff-Nielsen, O. E. & N. Shephard (2002): "Econometrics of Testing for Jumps in Financial Economics Using Bipower Variation." Journal of Financial Econometrics 4(1): pp. 1-30.
3. Barndorff-Nielsen, O. E. & N. Shephard (2004): "Power and Bipower Variation with Stochastic Volatility and Jumps." Journal of Financial Econometrics 2(1): pp. 1-37.
4. McAleer, M. & M. C. Medeiros (2008): "Realized Volatility: A Review." Econometric Reviews 27(1-3): pp. 10-45.
5. Ron, D. & A. Shamir (2013): "Quantitative Analysis of the Full Bitcoin Transaction Graph." Financial Cryptography and Data Security, Lecture Notes in Computer Science. Springer Berlin Heidelberg: pp. 6-24.