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Volume 8 - Number 1 | March 2024

Do crude oil, gold and the US dollar contribute to Bitcoin investment decisions? An ANN-DCC-GARCH approach

Yadong Liu, Nathee Naktnasukanjn, Anukul Tamprasirt, and Tanarat Rattanadamrongaksorn

25/03/2024 5 0 0
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Correlation Volatility Portfolio ANN BT

Abstract:

Purpose
Bitcoin (BTC) is significantly correlated with global financial assets such as crude oil, gold and the US dollar. BTC and global financial assets have become more closely related, particularly since the outbreak of the COVID-19 pandemic. The purpose of this paper is to formulate BTC investment decisions with the aid of global financial assets.

Design/methodology/approach
This study suggests a more accurate prediction model for BTC trading by combining the dynamic conditional correlation generalized autoregressive conditional heteroscedasticity (DCC-GARCH) model with the artificial neural network (ANN). The DCC-GARCH model offers significant input information, including dynamic correlation and volatility, to the ANN. To analyze the data effectively, the study divides it into two periods: before and during the COVID-19 outbreak. Each period is then further divided into a training set and a prediction set.

Findings
The empirical results show that BTC and gold have the highest positive correlation compared with crude oil and the USD, while BTC and the USD have a dynamic and negative correlation. More importantly, the ANN-DCC-GARCH model had a cumulative return of 318% before the outbreak of the COVID-19 pandemic and can decrease loss by 50% during the COVID-19 pandemic. Moreover, the risk-averse can turn a loss into a profit of about 20% in 2022.

Originality/value
The empirical analysis provides technical support and decision-making reference for investors and financial institutions to make investment decisions on BTC.

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