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Transfer‐entropy‐based dynamic feature selection for evaluating Bitcoin price drivers

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  • Sasan Barak
  • Navid Parvini

Abstract

Despite the growing literature in cryptocurrency forecasting and their price drivers, the relationship between their price and other financial time series is an ongoing matter of debate. This study proposes a three‐step methodology to cover these arguments. First, we conduct an ad hoc analysis using transfer entropy (TE) to study the causal relationship between Bitcoin (BTC) returns and a vast array of financial time series. Then, we utilize variables with a significant amount of information flow toward BTC returns to forecast multi‐step‐ahead BTC returns. Finally, we use explainable artificial intelligence post hoc analysis methods to discover the contribution of each input feature to the overall forecasting. The results indicate a significant change in the information flow pattern in the first days of the COVID‐19 pandemic outbreak. Additionally, our proposed TE‐based feature‐selection method outperforms both benchmarks, a nonfeature‐selection model, and backward stepwise regression.

Suggested Citation

  • Sasan Barak & Navid Parvini, 2023. "Transfer‐entropy‐based dynamic feature selection for evaluating Bitcoin price drivers," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 43(12), pages 1695-1726, December.
    • Handle: RePEc:wly:jfutmk:v:43:y:2023:i:12:p:1695-1726
    DOI: 10.1002/fut.22453
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