Using transfer entropy to measure information flows between cryptocurrencies

Ata Assaf, Mehmet Bilgin and Ender Demir

Physica A: Statistical Mechanics and its Applications, 2022, vol. 586, issue C

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.

Keywords: Cryptocurrencies; Information flows; Shannon Entropy; Rényi transfer entropy (search for similar items in EconPapers)
JEL-codes: C46 F38 G01 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (11)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:phsmap:v:586:y:2022:i:c:s0378437121007573

DOI: 10.1016/j.physa.2021.126484

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