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Sentiment-Induced Bubbles in the Cryptocurrency Market

Adam Smith Business School, University of Glasgow, Glasgow G12 8QQ, UK
Louvain Institute of Data Analysis and Modeling, Université catholique de Louvain, 1348 Louvain-la-Neuve, Belgium
Author to whom correspondence should be addressed.
J. Risk Financial Manag. 2019, 12(2), 53;
Received: 18 January 2019 / Revised: 24 March 2019 / Accepted: 28 March 2019 / Published: 1 April 2019
(This article belongs to the Special Issue Alternative Assets and Cryptocurrencies)
Cryptocurrencies lack clear measures of fundamental values and are often associated with speculative bubbles. This paper introduces a new way of testing for speculative bubbles based on StockTwits sentiment, which is used as the transition variable in a smooth transition autoregression. The model allows for conditional heteroskedasticity and fat tails of the conditional distribution of the error term, and volatility may depend on the constructed sentiment index. We apply the model to the CRIX index, for which several bubble periods are identified. The detected locally explosive price dynamics, given the specified bubble regime controlled by a smooth transition function, are more akin to the notion of speculative bubble that is driven by exuberant sentiment. Furthermore, we find that volatility increases as the sentiment index decreases, which is analogous to the commonly called leverage effect. View Full-Text
Keywords: cryptocurrencies; speculative bubbles; sentiment; smooth transition cryptocurrencies; speculative bubbles; sentiment; smooth transition
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Chen, C. .-H.; Hafner, C.M. Sentiment-Induced Bubbles in the Cryptocurrency Market. J. Risk Financial Manag. 2019, 12, 53.

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