Dimensionality reduction for prediction: Application to Bitcoin and Ethereum

Hugo Inzirillo and Benjamin Mat

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Abstract: The objective of this paper is to assess the performances of dimensionality reduction techniques to establish a link between cryptocurrencies. We have focused our analysis on the two most traded cryptocurrencies: Bitcoin and Ethereum. To perform our analysis, we took log returns and added some covariates to build our data set. We first introduced the pearson correlation coefficient in order to have a preliminary assessment of the link between Bitcoin and Ethereum. We then reduced the dimension of our data set using canonical correlation analysis and principal component analysis. After performing an analysis of the links between Bitcoin and Ethereum with both statistical techniques, we measured their performance on forecasting Ethereum returns with Bitcoin s features.

Date: 2021-12, Revised 2022-02
New Economics Papers: this item is included in nep-fmk, nep-his and nep-pay
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Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:2112.15036

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