Using correlated stochastic differential equations to forecast cryptocurrency rates and social media activities

Abstract

Abstract The growing interconnectivity of socio-economic systems requires one to treat multiple relevant social and economic variables simultaneously as parts of a strongly interacting complex system. Here, we analyze and exploit correlations between the price fluctuations of selected cryptocurrencies and social media activities, and develop a predictive framework using noise-correlated stochastic differential equations. We employ the standard Geometric Brownian Motion to model cryptocurrency rates, while for social media activities and trading volume of cryptocurrencies we use the Geometric Ornstein-Uhlenbeck process. In our model, correlations between the different stochastic variables are introduced through the noise in the respective stochastic differential equation. Using a Maximum Likelihood Estimation on historical data of the corresponding cryptocurrencies and social media activities we estimate parameters, and using the observed correlations, forecast selected time series. We successfully analyze and predict cryptocurrency related social media and the cryptocurrency market itself with a reasonable degree of accuracy. In particular, we show that our method has impressive accuracy in predicting whether a cryptocurrency market will increase or decrease a day in the future, a significant result with regards to investing and trading cryptocurrencies.

Keywords

• Cryptocurrency
• Social media activity
• Stochastic differential equations
• Maximum likelihood estimation
• Predictive modeling