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Regime Switching in the Cryptocurrency Market: Price Process Complexity Approach

Student: Karamashin Il`ya

Supervisor: Ilia Kuchin

Faculty: Faculty of Economic Sciences

Educational Programme: Financial Markets and Financial Institutions (Master)

Year of Graduation: 2024

The purpose of this work was to determine the return modes of the Bitcoin/USD cryptocurrency pair. In the course of the study, two modes for multifactor models and three modes for models without taking into account the considered factors were determined within the Markov model of mode switching. In the first chapter of the work, a literary review was carried out, on the basis of which two hypotheses were put forward. Hypothesis 1 refers to the verification of the influence of a set of factors (first lag of Bitcoin logreturns, gold, oil, Treasury bonds, S&P500 stock index, VIX volatility index, US dollar index DXY, realized volatility, momentum factor and Hurst indicator) on the studied modes of the Bitcoin/USD pair. Hypothesis 2 is to test the predictive ability of regime switching models in comparison with ARIMA, ARIMAX and linear regression models. The second chapter describes the methodology and approaches to calculating and forecast values. The third chapter examines the data used and presents the simulation results. The empirical database was used for the period from 04/01/2014 to 04/01/2024. The results confirm the first hypothesis about the lag factor, the S&P500 index, Treasury bonds and momentum. The second hypothesis is confirmed in accordance with the fact that in models with regime switching, the accuracy metric is higher for the MSM model with 10 factors, this result is also confirmed by the four-factor MSM, which allows to get the highest profitability with a simple trading strategy.

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