Markov-Switching Model Used to Track Bitcoin Volatility Regimes
A data analyst applied a Markov-switching regression model to study how the volatility of Bitcoin's daily returns shifted over time. The analysis used Binance BTCUSDT daily price data, with a training period spanning January 2, 2022 to June 30, 2026, covering 1,641 daily returns, and a 75-day holdout period through September 13, 2026. Both two-state and three-state model specifications were tested, identifying distinct low- and high-volatility regimes with fitted daily return standard deviations of roughly 1.53% and 4.30% in the two-state version. The two-state model performed slightly better on the holdout period by mean predictive log score, while the three-state model achieved a marginally lower training BIC, suggesting neither is a clear universal winner. The full visual report, built in OWL Compose, includes state probabilities, transition matrices, fitted distributions, and reproducibility notes.
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