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Prediction and interpretation of daily NFT and DeFi prices dynamics: Inspection through ensemble machine learning & XAI

Author

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  • Ghosh, Indranil
  • Alfaro-Cortés, Esteban
  • Gámez, Matías
  • García-Rubio, Noelia

Abstract

Non Fungible Tokens (NFT) and Decentralized Finance (DeFi) assets have seen a growing media coverage and garnered considerable investor traction despite being classified as a niche in the digital financial sector. The lack of substantial research to demystify the dynamics of NFT and DeFi coins motivates the scrupulous analysis of the said sector. This work aims to critically delve into the evolutionary pattern of the NFTs and DeFis for performing predictive analytics of the same during the COVID-19 regime. The multivariate framework comprises the systematic inclusion of explanatory features embodying technical indicators, key macroeconomic indicators, and constructs linked to media hype and sentiment pertinent to the pandemic, nonlinear feature engineering, and ensemble machine learning. Isometric Mapping (ISOMAP) and Uniform Manifold Approximation and Projection (UMAP) techniques are conjugated with Gradient Boosting Regression (GBR) and Random Forest (RF) for enabling the predictive analysis. The predictive performance rationalizes the frameworks' capacity to accurately predict the prices of the majority of the NFT and DeFi coins during the ongoing financial distress period. Additionally, Explainable Artificial Intelligence (XAI) methodologies are used to comprehend the nature of the impact of the explanatory variables. Findings suggest that the daily movement of the NFTs and DeFi highly depends on their past historical movement.

Suggested Citation

  • Ghosh, Indranil & Alfaro-Cortés, Esteban & Gámez, Matías & García-Rubio, Noelia, 2023. "Prediction and interpretation of daily NFT and DeFi prices dynamics: Inspection through ensemble machine learning & XAI," International Review of Financial Analysis, Elsevier, vol. 87(C).
    • Handle: RePEc:eee:finana:v:87:y:2023:i:c:s1057521923000741
    DOI: 10.1016/j.irfa.2023.102558
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    More about this item

    Keywords

    Non fungible tokens (NFT); Decentralized finance (DeFi); Feature engineering ensemble machine learning; Explainable artificial intelligence;
    All these keywords.

    JEL classification:

    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • F37 - International Economics - - International Finance - - - International Finance Forecasting and Simulation: Models and Applications
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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