Accepted Manuscript

What determines bitcoin exchange prices? A network VAR approach

Paolo Giudici, Iman Abu-Hashish

PII: S1544-6123(18)30128-4
DOI: 10.1016/j.frl.2018.05.013
Reference: FRL 945

To appear in: Finance Research Letters

Received date: 3 February 2018

Revised date: 24 May 2018
Accepted date: 29 May 2018

Please cite this article as: Paolo Giudici, Iman Abu-Hashish, What determines bitcoin exchange prices?
A network VAR approach, Finance Research Letters (2018), doi: 10.1016/j.frl.2018.05.013

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 ACCEPTED MANUSCRIPT

Highlights
• The paper proposes a new model that explains the dynamics of bitcoin
prices, based on a correlation network VAR process that models the

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interconnections between different crypto and classic asset prices.

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• The main methodological contribution of the paper consists in the in-
troduction of partial correlations and correlation networks into VAR

CR
models. This allows to describe the correlation patterns between bit-
coin prices and to disentangle the autoregressive component of prices
from its contemporaneous part, explained by the comovement with

US
other market prices. The introduction of VAR correlation networks
also allows to build a bitcoin price predictive model, that leverages the
information contained in the correlation patterns.
AN
• The empirical findings of the paper show that bitcoin prices from dif-
ferent exchanges are highly interrelated, as in an efficiently integrated
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market, with prices from larger and/or more connected trading ex-
changes driving the others. Our results also confirm that bitcoin prices
are typically unrelated with classical market prices, thus bringing fur-
ED

ther support to the ”diversification benefit” property of crypto assets.

• Another important advantage of the proposed model is that it can be

PT

used to predict bitoin prices. The empirical findings show that the
proposed model is able to predict bitcoin prices with an error that
can be approximated to about 11% of the average price. This error,
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however, varies considerably among different exchange markets: prices

from central bitcoin exchange markets are easier to predict. For almost
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all markets, the inclusion of a contemporaneous component in the pre-

dictive model leads to a predictive accuracy higher than that obtained
with a simpler pure autoregressive model.

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What determines bitcoin exchange

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prices? A network VAR approach ∗

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†

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Paolo Giudici Iman Abu-Hashish

Abstract US
AN
We aim to understand the dynamics of cryptocurrency prices and, specifi-
cally, how price information is transmitted between different crypto market
exchanges, and between crypto markets and traditional ones.
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To this aim, we propose an extended Vector Autoregressive model, aimed

at explaining the evolution of bitcoin prices. The extension is based on
network models, which improve over pure autoregressive models, as they
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introduce a contemporaneous contagion component, that describes contagion

effects between prices.
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Our empirical findings show that the proposed model is able to well de-
scribe the correlation structure between bitcoin prices in different exchange
markets, which appear rather strong, whereas the correlation of bitcoin prices
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with traditional assets is low. The model is also able to improve bitcoin price
predictions, with respect to a simpler autoregressive model.
Key words: Bitcoin exchanges, Bitcoin price contagion, Network mod-
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els.
∗
Department of Economics, University of Pavia and Department of Enginnering, Uni-
versity of Pavia
†
Corresponding author: giudici@unipv.it; Via S. Felice 5, 27100 Pavia (PV) - Italy

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1 Introduction
The research literature on crypto currencies is relatively new, as the phe-
nomena itself, but is constantly growing. After the seminal technical paper

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of Nakamoto (2008), the paper by Dwyer (2015) examines the economics
and financial properties of crypto currencies, and the recent paper by Corbet

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et al. (2018b) provides a systematic review of the literature that has been
developed after 2008 on cryptocurrencies as financial assets. Within such

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literature, a relevant stream of research concerns the study of the dynamics
of cryptocurrency market prices, either from an ”endogeneous” viewpoint or
in relationship with other ”classic” market prices.

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Our research aim is to understand how crypto currency prices depend
on each other, and on other asset prices. While some papers investigate
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this issue from a univariate statistical approach, focusing on bitcoin prices,
very few consider a multivariate statistics viewpoint, which focuses on the
interconnectdness among crypto prices or on those between crypto prices and
classic prices.
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A noticeable exception is the paper by Corbet et al. (2018a), who anal-

yses the relationships among alternative cryptocurrencies: Bitcoin, Litecoin
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and Ripple, and show that they are strongly interconnected, demonstrat-
ing similar patterns of returns and volatilty. A related paper is Ciaian et
al. (2018) who analyse the relationship between the bitcoin and sixteeen
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alternative coin prices, and found that they are indeed interdependent, but
independent from exogeneous factors. Corbet et al. (2018a) also analyse
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interdependence between crypto prices and a variety of other financial assets

such as gold, bonds and stocks. They found that the volatility of cryptoassets
is substantially higher than that of traditional assets, and that cryptocur-
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rencies are rather isolated from other assets, thus showing a diversification
benefit. Dyhrberg (2016) and Bouri et al. (2017) reach similar conclusion,
thus confirming that cryptocurrencies are rather ”isolated” from classical
assets. Note however that the same authors conclude that such isolation
emerges in the short run, but not in the long run and, thus, the evidence on

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the ”diversification benefit” is not conclusive.

Understanding price interconnectdness is important not only to describe
relationships between different asset prices, but also to understand whether
prices in different markets quickly react to each other or, in other words,

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whether markets are efficient. The paper by Brandvold et al. (2015) is

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the first one that addresses this question, studying the price discovery pro-
cess in bitcoin markets, by means of the econometric methodologies of Has-

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brouck (1995) and Gonzalo & Granger (1995). Using data from seven ex-
changes, in the period from April 2013 to February 2014, they find that
Mtgox (bankrupting shortly after sample period) and BTC-e are the price

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setters. Pagnottoni et al. (2018) extends their analysis to the period Jan-
uary 2014 to March 2017, and found an increased role of Chinese exchanges.
A related work is the paper of Urquhart (2016) who specifically analyzes
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whether bitcoin markets are efficient, using price return data from August
2010 through July 2016: they cannot confirm the efficient market hypothe-
sis. However, another study (Nadarajah & Chu, 2017) reveals that a power
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transformation of bitcoin returns can be concluded as ”weakly efficient” and,

thus, the evidence on bitcoin market efficiency is not conclusive.
Our contribution is based on the previous two streams of research, and
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aims to further acquire empirical evidence on whether bitcoin prices from

different exchanges are strongly interrelated, as in an integrated and efficient
market, following the paper by Brandvold et al. (2015); but also whether
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such interactions are affected by ”exogeneous” prices of classical assets, as in

the paper of Corbet et al. (2018a). In other words, we aim to answer, with
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the same multivariate statistical model, the question of whether the bitcoin,
whose capitalisation is now substantial, is still an investment diversifier and
the question of whether the markets where bitcoin are traded are efficiently
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integrated.
Besides shedding more light on the diversification and efficiency property
of bitcoin prices, we extend both Corbet et al. (2018a), Brandvold et al.
(2015), and the related papers, by modelling price interconnectdness with a

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novel correlation network approach which can be used not only to understand
price spillovers or driving markets, but also to predict bitcoin prices, using the
information contained in the multivariate interdependences among bitcoin
exchange prices and between bitcoin prices and classical asset prices.

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From an econometric viewpoint, our proposed correlation network model

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is an extended Vector Autoregressive model, aimed at explaining the evolu-
tion of bitcoin prices in different exchange markets, taking exogeneous classic

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asset prices into account. The extension is based on network models, which
improve over pure autoregressive models, as they introduce a contemporane-
ous contagion component, that describes contagion effects between prices.

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The validity of the model has been demonstrated in recent studies on sys-
temic risk, in which researchers have proposed correlation network models,
able to combine the rich structure of financial networks (see, e.g. Lorenz et
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al., 2009; Battiston et al., 2012) with a more parsimonious approach that
can estimate contagion effects from the dependence structure among mar-
ket prices. The first contributions in this framework are Billio et al. (2012)
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and Diebold and Yilmaz (2014), who derive contagion measures based on
Granger-causality tests and variance decompositions. More recently, Aheleg-
bey et al. (2015), Giudici and Spelta (2016) and Giudici and Parisi (2017)
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have extended this methodology introducing stochastic correlation networks.

While bivariate systemic risk models (such as Acharya et al. 2012, 2016;
Adrian and Brunnermeier, 2015) explain whether the risk of an institution is
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affected by a market crisis event or by a set of exogenous risk factors, corre-

lation network models explain whether the same risk depends on contagion
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effects, in a cross-sectional perspective.

We extend (a) the approach of Ahelegby et al. (2015), enriching their
VAR model using partial correlations; (b) the approach of Giudici and Spelta
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(2016) and Giudici and Parisi (2017), by enriching their graphical Gaussian
models with an autoregressive component derived through a VAR model.
The paper is organised as follows: Section 2 contains our proposed model;
Section 3 presents the available data; Section 4 the empirical application of

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the proposed model to the obtained data; Section 5 contains some concluding
remarks.

2 Proposal

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Let yti be the price of the bitcoin in a specific exchange market i (i = 1, . . . , I),
at time t (t = 1, . . . , T ). We assume that yti is a function of: (a) an autore-

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gressive component, that expresses the dependency on the past prices of
the same exchange; (b) a cross-sectional component, that expresses the con-
temporaneous dependency on the prices of other exchanges; (c) a stochastic

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residual. Formally, for each price i and time t we assume that the following
holds:
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p0
X X
yti = αpi yt−p
i
+ β ij ytj + it , (2.1)
p=1 j6=i

where p is a time lag (with p0 < t), αpi

and β ij are unknown coefficients to
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be estimated from data, and it are standard Gaussian residuals, which are
independent across time and exchanges.
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Equation (2.1) models the bitcoin price dynamics as a structural VAR, in

which the price in each exchange market depends on its p past values, through
Pp0 i i
the idiosyncratic autoregressive component p=1 αp yt−p and, in addition,
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it depends on the contemporary values of the other markets, through the

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systemic component j6=i β ij ytj .
The previous model can be expressed in a more compact matrix form, as
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follows:
p0
X
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Yt = Ap Yt−p + B0 Yt + Et , (2.2)
p=1

where Yt is a I-dimensional vector containing the prices of all exchanges at

time t, Yt−p is the same vector, lagged at time t − p, Ap is a p × I matrix
that contains the autoregressive coefficients, B0 is a I × I symmetric matrix

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with null diagonal elements containing the contemporaneous coefficients and,

finally, Et is a vector of standard Gaussian residuals independent across time.
For estimation purposes, the model in (2.2) can be transformed in a
reduced form, thus becoming:

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Yt = Γ1 Yt−1 + ... + Γp Yt−p + Ut , (2.3)
with

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

 Γ1 = (I − B0 )−1 A1 ,



...





 US
Γp = (I − B0 )−1 Ap ,
Ut = (I − B0 )−1 Et .
(2.4)
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The previous formulation allows the estimation of the vectors of modified
autoregressive coefficients Γ1 , ..., Γp , using time series data on bitcoin prices
contained in the stacked vector {Y1 , . . . , Yt , . . . , YT }.
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However, we are not interested in estimating Γp , but in separately esti-

mating its components {A1 , ..., Ap } and B0 , disentangling the autoregressive
part from the contemporaneous one. In this sense, once B0 is obtained,
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{A1 , ..., Ap } can be derived from (2.4).

To estimate B0 , note that (I − B0 )Ut = Et , so that Ut = B0 Ut + Et . This
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implies that, for each exchange i,

X
Uti = β ij Utj + it , (2.5)
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j6=i

meaning that the off-diagonal elements of B0 can be obtained regressing each

modified residual, derived from the application of (2.3), on those of the other
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exchanges.
Note that the regression model in (2.5) is based on the transformation
derived in equation (2.4), which makes the modified residuals correlated. The
direction of such correlation is, however, unknown. In the application of (2.5)

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it is therefore not clear which price residual assumes the form of a response
variable, and which one of an explanatory regressor.
A simplistic solution to this problem would be to estimate all possible
regressions, that is, to regress each bitcoin price on all the others: but this

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procedure would be, besides illogic, computationally inefficient.

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To solve this issue we propose to approximate each pair of regression
coefficients β ij and β ji , which represent two opposite causality directions,

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with their partial correlation coefficient, which is undirected, but univocally
determined by them.
Formally, let Σ = Corr(U ) be the correlation matrix between the mod-

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ified residuals, and let Σ−1 be its inverse, with elements σ ij . The partial
correlation coefficient ρij|S between the residuals U i and U j , conditional on
the remaining residuals (U s , s = 1, . . . , S), where S = I \ {i, j}, can be
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obtained as:

−σ ij
ρij|S = √ . (2.6)
σ ii σ jj
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It can be shown that:

p
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|ρij|S | = β ij · β ji , (2.7)
which means that the absolute value of the partial correlation coefficient
between U i and U j , given all the other residuals, can be obtained as the
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geometric average between the coefficients β ij and β ji defined by equation

(2.5) setting, respectively, i rather than j as response variables. Equation
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(2.7) justifies the replacement of β ij and β ji with their corresponding partial

correlation coefficient ρij|S .
From an economic viewpoint, the partial correlation coefficient expresses
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how the bitcoin price on an exchange i is affected by the contemporaneous

price of another exchanges (or of classical asets) j 6= i, keeping the other
prices fixed.
An important advantage that derives from the employment of partial cor-
relations lies in the possibility of employing correlation network models based

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on the conditional independence relationships described by partial correla-

tions.
More precisely, let us assume that the vectors Ut are independently dis-
tributed according to a multivariate normal distribution NI (0, Σ), where Σ

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represents the correlation matrix (that we assume to be non-singular).

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A correlation network model can be represented by an undirected graph
G such that G = (V, E), with a set of nodes V = {1, ..., I}, and an edge

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set E = V × V that describes the connections between the nodes. G can be
represented by a binary adjacency matrix E with elements eij , each of them
providing the information of whether a pair of vertices in G is (symmetrically)

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linked between each other (eij = 1) or not (eij = 0). If the nodes V of G are
put in correspondence with the random variables U1 , ..., UI , the edge set E
induces conditional independences on U via the so-called Markov properties
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(see e.g. Lauritzen, 1996).
Let Σ−1 be the inverse of Σ, whose elements can be indicated as {σ ij }.
Whittaker (1990) proved that the following equivalence holds:
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ρij|S = 0 ⇐⇒ Ui ⊥ Uj |UV \{i,j} ⇐⇒ eij = 0

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where the symbol ⊥ indicates conditional independence.

From a graph theoretic viewpoint, the previous equivalence means that a
link between two exchange prices is be present if and only if the corresponding
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partial correlation coefficient is significantly different from zero.

From a financial viewpoint, the previous equivalence implies that, if the
partial correlation between two measures is equal to zero, the corresponding
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price residuals are conditionally independent and, therefore, the correspond-

ing exchanges do not (directly) impact each other.
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Last, from a statistical viewpoint, it is also possible to test the null hy-
potheses that two exchanges are conditionally independent testing whether
the corresponding partial correlation coefficient is equal to zero, by means of
the staistical test described in Whittaker (1990) or in Giudici (2003).
Summing up, a (full) correlation network model among bitcoin exchange

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prices can be estimated on the basis of the (pairwise) partial correlation

coefficients between the modified residuals.

3 Data

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We consider, without loss of generality, the most important cryptocurrency:
the bitcoin, whose relative price will be taken with respect to the US dollar.

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With no further loss of generality, and to reduce volatility issues, we also
consider daily prices, obtained at the end of the day.
Our first aim is to assess whether bitcoin prices in different exchange

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markets are correlated with each other, thus exhibiting ”endogeneous” price
variations. To understand this question, we have chosen a set of representa-
tive exchanges, for which price data is available, in a sufficiently long period
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of time.
Specifically, we have selected eight exchange markets, representative of
different geographic locations, which represent about 60% of the total daily
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volume trades. Such exchanges are reported in Table 1, along with the
corresponding market shares. For each exchange market, we have collected
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daily data for a time period that goes from May, 18th, 2016, to April 30th,
2018.

[Table 1 about here]

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Our second aim is to understand whether bitcoin price variations can

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also be explained by exogeneous classical market prices. To evalauate this

issue, we have obtained daily data on some of the most important asset
prices: Gold, Oil and SP500; as well as on the exchange rates USD/Yuan
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and USD/Eur. Similarly to what done for bitcoin prices, we have considered,
as daily price, the market closing price.
When jointly considering bitcoin and ”standard” markets, one issue to
be solved is that, while Bitcoins are traded 24 hours per day and 7 days per
week, standard market prices have closing times and days. We have overcome

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this issue keeping standard market prices constant at the last closing time,
during market closure.
Figure 1 presents the time evolution of the Bitcoin prices, in the consid-
ered time period.

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[Figure 1 about here]

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From Figure 1 note the well known 2017 rise in Bitcoin prices, from a

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mimimum of about 430 dollars per bitcoin to a maximum of almost 20,000
dollars, followed by a high volatility in 2018. Note the slight differences
between prices, which shows that bitcoin prices in different market exchanges

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are not perfectly aligned. To better understand the latter finding, some
summary statistics on the considered data are presented in Table 2.
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[Table 2 about here]

Table 2 confirms the slight differences in bitcoin prices along the consid-
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ered market exchanges: the means and the standard deviations are slightly
different, and more so are the extreme statistics. With respect to classical
assets, such as Gold and Oil, the volatility of bitcoin prices is much higher:
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respectively, about 80 and 1400 times higher. Even with respect to SP500,
the volatility of Bitcoin prices is about 20 times higher. Finally, exchange
rates are, as well known, much less volatile than bitcoin prices. These results
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are in line with the available literature (see e.g. Corbet et al., 2016b).
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4 Empirical findings
In this Section we present the results from the application of the proposed
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model. Figure 2 presents, by means of a heatmap, all pairwise correlations

betwen the considered asset prices, in the considered time period. Posi-
tive correlations are marked in blue, and negative correlations in red, with
stronger colors indicating higher correlations (in absolute values).

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[Figure 2 about here]

From Figure 2 note that the correlations between different exchange prices
are quite high, revealing that markets are highly correlated and synchronised,
resulting in a strong endogeneous source of price variation. On the other

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hand, correlations with ”real” assets prices, such as gold and oil, are low, a

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result in line with the literature, that considers bitcoins as potential diversi-
fication assets (see e.g. Corbet et al., 2018a). However, the correlation with

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the SP500 index is positive and those with the exchange rates are negative,
a result that seems to conflict with the reference literature.
We believe that, before coming to a conclusion, correlations should be

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”netted” from ”spurious” effects. It is indeed well known that pairwise cor-
relation may be inflated by correlation that may arise from a common rela-
tionship with third variables. Partial correlations solve the issue calculating
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the correlation between the residuals from a linear regression model of each
of the two variables with all the remaining ones, thereby measuring the ”net”
or ”additional” correlation.
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In line with this suggestion, Figure 3 presents, by means of a heatmap

similar to the one in Figure 2 all pairwise partial correlations between the
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considered asset prices. In addition, to ease the interpretation, non significant

correlations, for which the p-value is greater than 0.05, are marked with a
cross.
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[Figure 3 about here]

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From Figure 3 note that many partial correlations are not significant, at
the 5% level. In particular, from the top part of the figure, most of the partial
correlations of the largest exchanges: Bitfinex, Coinbase and Bitstamp, are
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significant. Conversely, many partial correlations of the smallest exchanges:

Itbit, Kraken, Bittrex, are not significant. These results indicate that the
largest markets are the most important endogeneous driver of prices, a result
which matches the economic intuition that the largest trading volumes make
the price, in line with the literature (see e.g. Brandvold et al., 2015).

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With respect to the ”exogeneous” causes of bitcoin prices, note that oil
has no significant partial correlation with bitcoin prices, and gold only two,
but of a very low magnitude. This confirms what previously discussed about
the presence of a very low correlation between bitcoin prices and real asset

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prices.

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With respect to the partial correlation of bitcoin prices with financial
assets, note that these are either non significant or very weak, with the

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noticeable exception of the Hitbtc exchange prices. Thus, once correlations
are ”netted” from spurios effects, their nature of potential diversifiers, with
respect to ”standard” assets is confirmed, in line with the literature fidings

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(see e.g. Corbet et al., 2018a). This with the exception of specific market
exchanges, such as Hitbtc, presumably affected by the behaviour of ”local”
traders.
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Besides helping to clarify the meaning of correlations, partial correlations
can help describing the multivariate pattern of relationship between the in-
volved prices, by means of a graphical network model (see e.g. Lauritzen,
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1996 or Whittaker, 1990). This model can be obatained by associating each

asset price with a node in a graph, and drawing a link between two nodes
if and only if the corresponding partial correlation is significantly different
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from zero. Figure 4 contains the graphical network model that can be derived
from the considered data.
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[Figure 4 about here]

Figure 4 pictorially confirms our previous findings: bitcoin prices on one

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hand, and ”classic” asset prices on the other hand, form two rather distinct
clusters of connections, which are are highly interconnected inside. Note in
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particular the high centrality of two of the largest bitcoin exchanges: Bitfinex
and Bitstamp, confirming their nature of ”price setters”.
Note also that the link between the two clusters is given by the Hitbtc
exchange, which is affected both by standard asset prices and by other ex-
change market prices. The found behaviour of the Hitbtc exchange may be

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due to the peculiar nature of its investors, evidently acting simultaneously

on both traditional and crypto markets.
We have described the structure of the correlation pattern between the
considered prices, emphasizing the endogeneous and the exogeneous sources

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of variation. We now move to the construction of a model able to predict

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bitcoin prices, leveraging both sources of correlation.
By means of the previously calculated partial correlations we can derive

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the B0 matrix and, then, the autoregressive parameters A1 , . . . , Ap . We are
thus able to disentangle the time-dependent price of each asset i, separately
estimating the autoregressive idiosyncratic component and the contempora-

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neous one, according to equation (2.2). Table 3 shows the results of the
estimation.
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[Table 3 about here]

From Table 3 note that the autoregressive component prevails only for
the exchange rates, much more stable and less connected with other prices,
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with respect to other assets. In all other cases and, in particular, for bitcoin
prices, the multivariate contemporaneous component prevails, by far. This
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means that most prices are driven by correlations with contemporaneous

prices, rather than by their past behaviour: a strong indication that taking
into account interconnectdness between exchange markets is necessary to
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correctly estimate bitcoin prices.

We now assess the predictive performance of our proposed model, to
understand if the proposed structural VAR is able to well predict bitcoin
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prices. In particular, we are interested to evaluate whether the introduction of

the contemporaneous component improves predictive accuracy, with respect
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to a much simpler pure autoregressive model.

We build our model using all data, apart from the last fifty days (about
10% of our data). With the obtained model, we predict the bitcoin prices
for those days, with one day ahead rolling predictions, and compare the
predictions with the observed prices. We also compare the same predictions

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with those obtained with a simpler model, based only on the autoregressive
component, without the contemporaneous effect. Note that, in both cases, to
make the model more realistic, and useful in practice, we have replaced the
contemporeaneous prices at time t with those at time t − 1. To compare the

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two models, and understand which one better performs in a predictive sense,

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we use, as a summary metric, the root mean squared error of the predicitons,
with respect to the actual observed values.

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Table 4 contains, for each asset price, the root mean squared errors of the
predictions.

[Table 4 about here]

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Table 4 shows that the root mean squared errors of the eight bitcoin price
predictions, under our proposed model (RMSE full) average at about 11%
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of the mean prices, about 100 times higher than the corresponding value for
the oil price, about 50 times higher for SP500 and USD/YUAN and about 20
times higher for gold and USD/EUR. This result is in line with the economic
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intuition that it is more difficult to predict more volatile assets.

The comparison of predictive RMSEs along different market prices in
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Table 4 suggests that the less central (more remote) exchanges in Figure 4,
such as Gemini, Kraken and Coinbase, are the most difficult to predict; this
because they are less connected to observed market prices and, presumably,
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are more dependent on external ”perturbations”, related to changes in the

regulatory environment or, simply, to changes in the sentiment of crypto
investors. Indeed note that the bitcoin price of HitBtc, highly connected to
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many other nodes, and that of Bitfinex, the leading trading exchange and
the strongest price setter, show the minimum prediction errors, confirming
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our finding.
Table 4 also shows that the proposed model generally overperforms a
simpler pure autoregressive model, thus justifying its additional complexity
with an increase in predictive power. This, however, with the exception of
two of the least central exchanges: Gemini and Kraken. This further suggests

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that our proposed model better predicts market exchange prices which are
more interconnected with the others and/or the ones that are more connected
to classic asset prices.

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5 Conclusions

IP
In the paper we have proposed a new model that explains the dynamics of

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bitcoin prices, based on a correlation network VAR process that models the
interconnections between different crypto and classic asset prices.
Our main methodological contribution consists in the introduction of par-

US
tial correlations and correlation networks into VAR models. This allows to
describe the correlation patterns between bitcoin prices and to disentan-
gle the autoregressive component of prices from its contemporaneous part,
AN
explained by the comovement with other market prices. The introduction
of VAR correlation networks also allows to build a bitcoin price predictive
model, that leverages the information contained in the correlation patterns.
M

Our empirical findings show that bitcoin prices from different exchanges
are highly interrelated, as in an efficiently integrated market, with prices from
ED

larger and/or more connected trading exchanges driving the others. Our
results also confirm that bitcoin prices are typically unrelated with classical
market prices, thus bringing further support to the ”diversification benefit”
PT

property of crypto assets.

An important advantage of the proposed model is that it can be used to
predict bitoin prices. Our empirical findings show that the proposed model is
CE

able to predict bitcoin prices with an error that can be approximated to about
11% of the average price. This error, however, varies considerably among
different exchange markets: prices from central bitcoin exchange markets are
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easier to predict. For almost all markets, the inclusion of a contemporaneous

component in the predictive model leads to a predictive accuracy higher than
that obtained with a simpler pure autoregressive model.
Future work requires acquiring more data, on traded volumes and possibly

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also on the electronic identity of the traders, to investigate the reason of

”local” behaviours of exchange markets. From a methdological viewpoint, it
may be worth considering extending correlation network models to become
time dependent, although this requires getting data with a higher frequency.

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Acknowledgements

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We acknowledge useful comments and suggestions from two anonymous ref-
erees, which have helped to substantially improve the paper.

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Figures and Tables

Table 1: Exchange markets by daily trading volumes

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Exchange Market share

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Bitfinex 42%
Coinbase 6%

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Bitstamp 5%
Hitbtc 3%
Gemini 2%
itBit
Kraken
Bittrex
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0.5%
0.5%
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Note: The considered market exchanges, by daily trade volume market shares.
Data taken from https://cryptocoincharts.info/markets/info
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Table 2: Summary statistics

Price Mean St. Dev. Min Max

Bitfinex Bitcoin 3899.56 4274.46 435.61 19187.12

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Coinbase Bitcoin 3919.05 4318.98 438.38 19650.01

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Bitstamp Bitcoin 3899.04 4286.02 439.62 19187.78
HitBtc Bitcoin 3916.19 4297.17 436.36 19095.30

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Gemini Bitcoin 3910.38 4306.36 437.57 19475.90
ItBit Bitcoin 3907.13 4300.32 438.61 19357.97
Kraken Bitcoin 3890.18 4272.55 433.50 19356.91
Bittrex Bitcoin
Gold
Oil
3893.83
1275.57
48.67
US 4269.89
52.34
3.16
421.11
1128.42
39.51
19261.10
1366.38
54.45
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SP500 2414.78 212.308 2000.54 2872.87
USDYuan 6.67 0.19 6.26 6.96
USDEur 0.88 0.04 0.80 0.96
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Note: Summary statistics for bitcoin and classic asset prices. Means, standard
deviations, minimum and maximum values are all expressed in dollars.
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Figure 1: The time series plot of Bitcoin prices.
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Figure 2: Correlation matrix between prices.

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Figure 3: Partial correlation matrix between prices.

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Table 3: Estimation components

Asset Contemp Autoreg

Bitfinex Bitcoin 452.31 0.74

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Coinbase Bitcoin 453.55 0.68

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Bitstamp Bitcoin 450.35 0.19
HitBtc Bitcoin 451.98 0.37

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Gemini Bitcoin 450.01 0.20
ItBit Bitcoin 451.01 0.19
Kraken Bitcoin 451.02 0.28
Bittrex Bitcoin
Oil
SP500
US 452.15
4.03
197.26
0.69
0.95
0.97
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USDYuan 0.51 0.99
USDEur 0.06 0.96
Gold 97.51 0.99
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Note: comparison between the two components of prices obtained with our pro-
posed structural VAR model.
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Table 4: Predictive performance summary

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Prices RMSE full RMSE autoreg
Bitfinex Bitcoin 267.37 293.49
Coinbase Bitcoin
Bitstamp Bitcoin
HitBtc Bitcoin
US550.10
379.71
288.63
579.98
397.25
342.50
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Gemini Bitcoin 792.22 786.58
ItBit Bitcoin 331.62 455.45
Kraken Bitcoin 718.51 676.35
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Bittrex Bitcoin 290.84 305.51

Oil 0.55 0.58
SP500 5.90 6.35
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USDYuan 0.02 0.02

USDEur 0.002 0.003
Gold 6.74 7.19
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Note: comparison between the root mean square errors (RMSE) obtained with our
full structural VAR model (RMSE full) and with a model composed by the solely
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autoregressive component (RMSE only autoregressive).

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Figure 4: Graphical correlation network model between prices. Legend:

usdr=USD/EURO, usdy=USD/YUAN,oil=oil, s50= SP500, gld=gold, btc-
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h= bitcoin hitbtc, btc-btt= bitcoin bittrex, btc-btf= bitcoin bitfinex, btc-k

= bitcoin kraken, btc-bts= bitcoin bitstamp, btc-g= bitcoin gemini, btc-
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c=bitcoin coinbase, btc-t=bitcoin itbit.

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