Vector Autoregression in Cryptocurrency Markets: Unraveling Complex Causal Networks

TL;DR

This study shows that simple multivariate linear models can effectively reveal the complex causal and interconnected structures in cryptocurrency markets, highlighting key influential coins and their relationships.

Contribution

It demonstrates that straightforward linear models are sufficient to uncover meaningful market dynamics and influential nodes in the rapidly evolving cryptocurrency market.

Findings

Node degree correlates with market capitalization ($ ho=0.193$).

Most network structure is driven by a small subset of influential coins.

Simple models reveal inherent complexity and key influencers in the market.

Abstract

Methodologies to infer financial networks from the price series of speculative assets vary, however, they generally involve bivariate or multivariate predictive modelling to reveal causal and correlational structures within the time series data. The required model complexity intimately relates to the underlying market efficiency, where one expects a highly developed and efficient market to display very few simple relationships in price data. This has spurred research into the applications of complex nonlinear models for developed markets. However, it remains unclear if simple models can provide meaningful and insightful descriptions of the dependency and interconnectedness of the rapidly developed cryptocurrency market. Here we show that multivariate linear models can create informative cryptocurrency networks that reflect economic intuition, and demonstrate the importance of high-influence nodes. The resulting network confirms that node degree, a measure of influence, is significantly correlated to the market capitalisation of each coin ($\rho=0.193$). However, there remains a proportion of nodes whose influence extends beyond what their market capitalisation would imply. We demonstrate that simple linear model structure reveals an inherent complexity associated with the interconnected nature of the data, supporting the use of multivariate modelling to prevent surrogate effects and achieve accurate causal representation. In a reductive experiment we show that most of the network structure is contained within a small portion of the network, consistent with the Pareto principle, whereby a fraction of the inputs generates a large proportion of the effects. Our results demonstrate that simple multivariate models provide nontrivial information about cryptocurrency market dynamics, and that these dynamics largely depend upon a few key high-influence coins.