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Using transfer entropy to measure information flows between cryptocurrencies

Author

Listed:
  • Assaf, Ata
  • Bilgin, Mehmet Huseyin
  • Demir, Ender
Abstract
In this paper, we use the transfer entropy to quantify information flows between three cryptocurrencies, namely Bitcoin, Ethereum and Ripple. We also employ the concept of Rényi transfer entropy that allows for capturing rare and frequent events separately as well as non-linear market dependencies, focusing on extreme (tail) observations of the return distributions. We find that Bitcoin and Ripple share a bidirectional information transmission, while there is only one directional information transmission from Ripple to Ethereum. There is no nonlinear information transmission according to the Rényi’s measure, which implies the linear dependency among the three cryptocurrencies. This information transmission between cryptocurrencies occurs mostly in the pre-crash period while they become independent after the 2017 cryptocurrency crash. We finally use the concept of volatility surprise to examine linkages among the volatility of our series, and find a highly significant information transmission flow in one direction from Bitcoin to Ripple. Our results should be useful to investors in helping them in developing investment strategies by considering these three cryptocurrencies.

Suggested Citation

  • Assaf, Ata & Bilgin, Mehmet Huseyin & Demir, Ender, 2022. "Using transfer entropy to measure information flows between cryptocurrencies," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 586(C).
    • Handle: RePEc:eee:phsmap:v:586:y:2022:i:c:s0378437121007573
    DOI: 10.1016/j.physa.2021.126484
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    References listed on IDEAS

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    4. Pagnottoni, Paolo, 2023. "Superhighways and roads of multivariate time series shock transmission: Application to cryptocurrency, carbon emission and energy prices," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 615(C).
    5. Ferreira, Joaquim & Morais, Flávio, 2023. "Predict or to be predicted? A transfer entropy view between adaptive green markets, structural shocks and sentiment index," Finance Research Letters, Elsevier, vol. 56(C).
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    7. Tong, Zezheng & Goodell, John W. & Shen, Dehua, 2022. "Assessing causal relationships between cryptocurrencies and investor attention: New results from transfer entropy methodology," Finance Research Letters, Elsevier, vol. 50(C).
    8. Dhifaoui, Zouhaier & Khalfaoui, Rabeh & Abedin, Mohammad Zoynul & Shi, Baofeng, 2022. "Quantifying information transfer among clean energy, carbon, oil, and precious metals: A novel transfer entropy-based approach," Finance Research Letters, Elsevier, vol. 49(C).
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    More about this item

    Keywords

    Cryptocurrencies; Information flows; Shannon Entropy; Rényi transfer entropy;
    All these keywords.

    JEL classification:

    • C46 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Specific Distributions
    • F38 - International Economics - - International Finance - - - International Financial Policy: Financial Transactions Tax; Capital Controls
    • G01 - Financial Economics - - General - - - Financial Crises

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