Forecasting the price trends of digital currency: a hybrid model integrating the stochastic index and grey Markov chain methods

Abstract

Purpose

Since the issuance in 2009, the digital currency has enjoyed an increasing popularity and has become one of the most important options for global investors. The purpose of this paper is to propose a hybrid model ( KDJ–Markov chain) which integrates the advantages of the stochastic index (KDJ) and grey Markov chain methods and provide a useful decision support tool for investors participating in the digital currency market.

Design/methodology/approach

Taking Litecoin's closing price prediction as an example, the closing prices from May 2 to June 20, 2017, are used as the training set, while those from June 21 to August 9, 2017, are used as the test set. In addition, an adaptive KDJ–Markov chain is proposed to enhance the adaptability for dynamic transaction information. And the paper verifies the effectiveness of the KDJ–Markov chain method and adaptive KDJ–Markov chain method.

Findings

The results show that the proposed methods can provide a reliable foundation for market analysis and investment decisions. Under the circumstances the accuracy of the training set and the accuracy of the test set are 76% and 78%, respectively.

Practical implications

This study not only solves the problems that KDJ method cannot accurately predict the next day's state and the grey Markov chain method cannot divide the states very well, but it also provides two useful decision support tools for investors to make more scientific and reasonable decisions for digital currency where there are no existing methods to analyze the fluctuation.

Originality/value

A new approach to analyze the fluctuation of digital currency, in which there are no existing methods, is proposed based on the stochastic index (KDJ) and grey Markov chain methods. And both of these two models have high accuracy.

Citation

Shou, M.-H., Wang, Z.-X., Li, D.-D. and Zhou, Y.-T. (2021), "Forecasting the price trends of digital currency: a hybrid model integrating the stochastic index and grey Markov chain methods", Grey Systems: Theory and Application, Vol. 11 No. 1, pp. 22-45. https://doi.org/10.1108/GS-12-2019-0068