On the inefficiency of Bitcoin

TLDR: In this paper, a simple power transformation of the Bitcoin returns does satisfy the hypothesis through the use of eight different tests, and the transformation used does not lead to any loss of information.

About: This article is published in Economics Letters.The article was published on 2017-01-01 and is currently open access. It has received 446 citations till now. The article focuses on the topics: Efficient-market hypothesis.

Figures

Table 1: Some summary statistics.

Figure 2: Variance ratio statistic versus holding period: full period (left), first subsample period (middle) and second subsample period (right).

Figure 1: p-values of the Ljung-Box test versus lag: full period (left), first subsample period (middle) and second subsample period (right).

Frequently asked questions

Q1. What is the effect of powering to even integers?

Powering to even integers will lead to loss of information because the transformed values will always be non-negative (returns can be negative). 

Q2. What tests have been used to check the efficiency of Bitcoin returns?

The authors have used eight different tests: Ljung-Box test for no autocorrelation; runs test for independence; Bartel’s test forindependence; wild-bootstrapped automatic variance ratio test for the random walk hypothesis; spectral shape tests for the random walk hypothesis; BDS test that the returns are independently and identically distributed; robustified portmanteau test for no serial correlation; the generalized spectral test for the martingale difference hypothesis. 

Q3. What is the way to test the power of Bitcoin returns?

the only power transformation that can be applied to Bitcoin returns without loss of information is the odd integer power transformation. 

Q4. What tests were used to check the efficiency of Bitcoin returns?

Urquhart (2016) applied the following tests to check weak efficiency of Bitcoin returns: LjungBox test for no autocorrelation; runs test for independence; Bartel’s test for independence; wildbootstrapped automatic variance ratio test for the random walk hypothesis; BDS test that the returns are independently and identically distributed. 

Q5. What is the effect of the tests on the null hypothesis?

The transformed data obtained this way is less variable, more peaked, more skewed, less serially correlated, less autocorrelated, more like a random walk and more independently and identically distributed compared to the original returns. 

Q6. What is the name of the cryptocurrency?

Introduced and first documented by Satoshi Nakamoto in 2009, Bitcoin is a form of cryptocurrency - an “electronic payment system based on cryptographic proof” (Nakamoto, 2009), instead of traditional trust. 

Q7. What tests supported the weakly efficient hypothesis?

According to his results, the Ljung-Box and wild-bootstrapped automatic variance ratio tests supported the weakly efficient hypothesis for the second of the two subsample periods. 

Q8. What is the evidence against the random walk hypothesis?

the authors performed the wild-bootstrapped automatic variance ratio test (Kim, 2009) to check whether the random walk hypothesis holds for the returns. 

Q9. What is the probability of the return being independently and identically distributed?

Variance Ratios and 95% confidence bandVariance Ratios and 95% confidence bandVariance Ratios and 95% confidence bandFifthly, the authors performed the spectral shape tests (Durlauf, 1991; Choi, 1999) also to test if the random walk hypothesis holds for the returns. 

Q10. What were the p-values based on the Anderson-Darling statistic?

The p-values based on the Anderson-Darling statistic for the full, first subsample and second subsample periods were 1, 1 and 1, respectively. 

Q11. What is the name of the paper?

Using a known technique that is robust in detecting bubbles, Cheung et al. (2015) investigated the existence of bubbles in the Bitcoin market. 

Q12. What is the main reason why the authors studied the Bitcoin market?

Glaser et al. (2014)’s analysis looked into whether Bitcoin intra-network transaction and on-exchange trading volumes are linked, and also tries to determine if Bitcoin can be classed as an asset or a currency.