When Elon Musk Changes his Tone, Does Bitcoin Adjust Its Tune?

We present a textual analysis that explains how Elon Musk’s sentiments in his Twitter content correlates with price and volatility in the Bitcoin market using the dynamic conditional correlation-generalized autoregressive conditional heteroscedasticity model, allowing less sensitive to window size than traditional models. After examining 10,850 tweets containing 157,378 words posted from December 2017 to May 2021 and rigorously controlling other determinants, we found that the tone of the world’s wealthiest person can drive the Bitcoin market, having a Granger causal relation with returns. In addition, Musk is likely to use positive words in his tweets, and reversal effects exist in the relationship between Bitcoin prices and the optimism presented by Tesla’s CEO. However, we did not find evidence to support linkage between Musk’s sentiments and Bitcoin volatility. Our results are also robust when using a different cryptocurrency, i.e., Ether this paper extends the existing literature about the mechanisms of social media content generated by influential accounts on the Bitcoin market.

An Algorithm for the Pricing and Timing of the Option to make a Two-Stage Investment with Credit Guarantees

We develop a jump-diffusion model for a guarantee-investment combination financing mode (G-I mode) that is recently popular in financial practice. We assume that a borrower has exclusively an option to invest in a project in two stages. The project’s cash flow follows a double exponential jump-diffusion process and it is increased by a growth factor once the second-stage investment is exercised. The first-stage investment cost is financed by a bank loan with the guarantee provided by an insurer, who promises to provide the second-stage investment cost as well as take the lender’s all default losses. In return for the guarantee and investment, the borrower pays a guarantee fee upon first investment and grants a fraction of equity upon second investment to the insurer. In sharp contrast to prior papers on guarantee, the guarantee costs are contracted prior to investment. We provide closed-form solutions and produce a numerical algorithm for the timing and pricing of the two investment options.

A Method to Pre-compile Numerical Integrals When Solving Stochastic Dynamic Problems

We show how the interpolation step of numerical integration can be pre-compiled in partial equilibrium stochastic dynamic problems. We display the pre-compilation’s sufficient conditions and document its speed gains using a consumption-savings model with a discrete labour choice, wage uncertainty and stochastic non-labour income.