Using transfer entropy to measure information flows between cryptocurrencies

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 Renyi 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 Renyi'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. (C) 2021 Elsevier B.V. All rights reserved.