Financial time series: A technical analysis

Using financial time series we will analyze Bitcoin, Apple stocks and S&P 500 market index charts, find patterns and trends and draw conclusions.

From the first sight we can notice clear similarities between the Apple chart and the S&P 500 market index chart.

In terms of noise and trends:

Both Apple stocks and S&P 500 are characterized by a general (long term) upward trend followed by a bearish looking downward trend, When it comes to the Bitcoin chart there isn’t much similarities between the latter and the S&P 500 chart.

The Bitcoin chart can be characterized by its stability in the first third followed by sky rocketing prices in the second third and a long term downward trend in the last third.

Using financial time series alone we could differentiate between the similarities and non similarities between Bitcoin, Apple stocks and the S&P 500 market index.

Risk and Return trade off

Not only are the returns of an asset/market widely used because of their assumed normality, but also because of the valuable informations they give concerning the asset/market’s performance and the risk associated with it, thus calculating the returns of Bitcoin, Apple stocks and the S&P 500 market index will give us a clear idea about each one’s performance and how similar they are in terms of risk and reward.

We can easily notice the extreme noise in all of the figures above, with the difference that the return interval on the y-axis of Apple and S&P 500 are virtually the same (Apple’s return interval is slightly bigger) while Bitcoin has a clearly wider return interval, the return on Bitcoin is bigger so is the risk associated with it.

The probability density function gives us an even clearer look at the distributivity of Bitcoin, Apple stocks and S&P 500 returns, the Bitcoin probability distribution is fat tailed which is not a surprise for an “asset” notoriously known for its extreme volatility (σ = 4.84 %), while the probability distributions of Apple and the S&P 500 are the total opposite thanks to their relatively low standard deviation.

We can’t possibly talk about market dynamics and the systematic risk associated with it without mentioning the Beta financial metric, it’s by far one of the most important parameters in finance, for those who don’t know Beta is used to measure the volatility, or sensitivity, of a security or a portfolio in comparison to the entire market or a benchmark (S&P 500 in our example), a Beta closer or equal to 1 means that the security is as volatile as the market it more often moves up as the market index moves up and goes down as the market goes down, a Beta exceeding 1 means that the security is more volatile than the market in a bull market the security would outperform the latter while in a bear market the security will suffer heavier losses, a Beta closer or equal to -1 means that the security more often moves up as the market index goes down and goes down as the market index moves up, a zero Beta or Beta closer to zero means that the security more often doesn’t respond to market swings.

Upon calculating the Beta of Apple stocks and Bitcoin we get the following results:

β Apple = 1.18 and β Bitcoin = 0.21, the two values indicate that Apple stocks swing a little bit more than the S&P 500 while Bitcoin as the value of its Beta indicates is less responsive to the market movements.

While Beta shows how strongly one asset (or portfolio) responds to the systemic risk of the entire market, the correlation coefficient quantifies the intensity of the linear relationship between two (or more) variables X (Bitcoin and Apple stocks) and Y (S&P 500 market index), a perfectly positive correlation (r =1) means that the two variables have a perfect linear relationship, a perfectly negative correlation (r = -1) means that the two variable are inversely correlated, while a correlation of zero (r = 0) means there is no inherent relationship between the variables X and Y.

Correlation Matrix

The correlation matrix above shows the relationship degree between Bitcoin, Apple stocks and S&P 500, with Corr(Apple, S&P 500) equal to 0.65 indicating a fairly strong (but not perfect) relationship between the S&P 500 and Apple stocks fluctuations, while both Corr(Bitcoin, Apple) and Corr(Bitcoin, S&P 500) being near zero implying an extremely weak relationship between Bitcoin and S&P 500 market index movements.

The core conclusions that we can draw from this statistical analysis are as follows:

Bitcoin (unlike Apple stocks) is not responsive to market movements.

Bitcoin is more volatile than the market thus riskier.

An extremely weak relationship (if not non-existent) between Bitcoin and market movements.

Can Bitcoin be used for hedging ?

From the conclusions we have drawn you might legitimately ask whether Bitcoin can be used to hedge the systematic risk associated with the market, the answer would’ve been a straight “yes” if Bitcoin wasn’t an extremely volatile “asset” but it all depends on the investor’s mindset and how ready he is to take on the inherent risk of the cryptocurrency market.

For contacts:

Twitter: @AegeusZerium

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