Cryptocurrency uncertainty and volatility forecasting of precious metal futures markets

Abstract

Several common properties shared by cryptocurrencies and precious metals, such as safe haven, hedge and diversification for risk assets, have been widely discussed since Bitcoin was created in 2008. However, no studies have explored whether cryptocurrency market uncertainties can help to explain and forecast volatilities in precious metal markets. By using the GARCH-MIDAS model incorporating cryptocurrency policy and price uncertainty, as well as several other commonly used uncertainty measures, this paper compares the in-sample impacts and out-of-sample predictive abilities of these uncertainties on volatility forecasts of COMEX gold and silver futures markets. The in-sample results demonstrate the significant impacts of cryptocurrency uncertainty on the volatilities of precious metal futures markets, and the out-of-sample evidence further confirms the superior predictive power of cryptocurrency uncertainty on volatility forecasting of the precious metal market. Our conclusions are robust through various model evaluation approaches based not only on predicting errors but also on forecasting directions across different forecasting time horizons. Keywords: Cryptocurrency uncertainty, Model evaluation, Precious metal, Volatility forecasting