Who dominate the information flowing between innovative and traditional financial assets? A multiscale entropy-based approach

Abstract

We investigate the interactions between innovative financial assets (e.g., FinTech-related stocks, green bonds, and cryptocurrencies) and traditional ones (e.g., global equities, gold, crude oil, U.S. dollar, and government bonds) at short-, medium-, and long-time scales by adopting the multiscale entropy-based approach, through which the dominant influencers in information flowing are identified. Also, we discuss the impact of unprecedented events exemplified by the COVID-19 pandemic. Further, we propose the high-transfer-entropy trading strategy that considers the dominant influencers. The empirical results show that (i) the information exchange is heterogenous at three time scales, with the greatest intensity at short-time scale; (ii) no isolated dominant influencer is discovered, and the traditional assets are stronger influencers in long term while the innovative assets are more influential in short and medium terms; (iii) the COVID-19 pandemic alters the magnitude and direction of information transfer, during which the influence of innovative assets relative to traditional assets enhances evidently; and (iv) the high-transfer-entropy strategy can effectively provide the investor with excess returns.