Forecasting the volatility of Bitcoin: The importance of jumps and structural breaks

Dehua Shen, Andrew Urquhart and Pengfei Wang

European Financial Management, 2020, vol. 26, issue 5, 1294-1323

Abstract: This paper studies the volatility of Bitcoin and determines the importance of jumps and structural breaks in forecasting volatility. We show the importance of the decomposition of realized variance in the in‐sample regressions using 18 competing heterogeneous autoregressive (HAR) models. In the out‐of‐sample setting, we find that the HARQ‐F‐J model is the superior model, indicating the importance of the temporal variation and squared jump components at different time horizons. We also show that HAR models with structural breaks outperform models without structural breaks across all forecasting horizons. Our results are robust to an alternative jump estimator and estimation method.

Date: 2020
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