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Choi I, Kim WC. Enhancing Exchange-Traded Fund Price Predictions: Insights from Information-Theoretic Networks and Node Embeddings. ENTROPY (BASEL, SWITZERLAND) 2024; 26:70. [PMID: 38248195 PMCID: PMC10814172 DOI: 10.3390/e26010070] [Citation(s) in RCA: 0] [Impact Index Per Article: 0] [Reference Citation Analysis] [Abstract] [Key Words] [Track Full Text] [Subscribe] [Scholar Register] [Received: 10/31/2023] [Revised: 12/02/2023] [Accepted: 12/22/2023] [Indexed: 01/23/2024]
Abstract
This study presents a novel approach to predicting price fluctuations for U.S. sector index ETFs. By leveraging information-theoretic measures like mutual information and transfer entropy, we constructed threshold networks highlighting nonlinear dependencies between log returns and trading volume rate changes. We derived centrality measures and node embeddings from these networks, offering unique insights into the ETFs' dynamics. By integrating these features into gradient-boosting algorithm-based models, we significantly enhanced the predictive accuracy. Our approach offers improved forecast performance for U.S. sector index futures and adds a layer of explainability to the existing literature.
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Affiliation(s)
| | - Woo Chang Kim
- Department of Industrial and Systems Engineering, Korea Advanced Institute of Science and Technology, Daejeon 34141, Republic of Korea;
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2
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Assaf A, Mokni K, Youssef M. COVID-19 and information flow between cryptocurrencies, and conventional financial assets. THE QUARTERLY REVIEW OF ECONOMICS AND FINANCE : JOURNAL OF THE MIDWEST ECONOMICS ASSOCIATION 2023; 89:73-81. [PMID: 36908506 PMCID: PMC9972776 DOI: 10.1016/j.qref.2023.02.010] [Citation(s) in RCA: 0] [Impact Index Per Article: 0] [Reference Citation Analysis] [Abstract] [Key Words] [Track Full Text] [Figures] [Subscribe] [Scholar Register] [Received: 10/15/2021] [Revised: 01/08/2023] [Accepted: 02/27/2023] [Indexed: 05/25/2023]
Abstract
In this paper, we analyze the impact of the ongoing COVID-19 pandemic on the information flow among the main cryptocurrencies (Bitcoin, Ethereum, Ripple, and Litecoin) and those of the fear index (VIX), Gold price, and the US equity market (S&P500). We use the transfer entropy measure to determine the information flow by allowing for nonlinear dynamics and extreme tail values in the series. Our results indicate that information flow and sharing have changed during the COVID-19 pandemic with the following main findings: i) cryptocurrencies show more correlation with VIX, Gold, and the US equity markets during the COVID-19 period; ii) Gold and VIX maintain their position as safe hedging tools against the pandemic; iii) during COVID-19, S&P500 is the dominant flow transmitter to the four cryptocurrencies, and iv) Ripple plays the dominant role of information flow to VIX, Gold, and S&P500.
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Affiliation(s)
- Ata Assaf
- Faculty of Business and Management, University of Balamand, P.O.Box: 100 Tripoli, Lebanon
- Cyprus International Institute of Management (CIIM), P. O. Box 20378, 2151 Nicosia, Cyprus
| | - Khaled Mokni
- Institut Supérieur de Gestion de Gabès, Gabès University, Gabès 6002, Tunisia
| | - Manel Youssef
- Centre des Etudes et Recherches Economiques et Sociales (CERES), Ecovis KDH Partners, 71 AV. Alain Savary, Tunis 1003, Tunisia
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3
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Zitis PI, Kakinaka S, Umeno K, Hanias MP, Stavrinides SG, Potirakis SM. Investigating Dynamical Complexity and Fractal Characteristics of Bitcoin/US Dollar and Euro/US Dollar Exchange Rates around the COVID-19 Outbreak. ENTROPY (BASEL, SWITZERLAND) 2023; 25:e25020214. [PMID: 36832580 PMCID: PMC9955772 DOI: 10.3390/e25020214] [Citation(s) in RCA: 2] [Impact Index Per Article: 2.0] [Reference Citation Analysis] [Abstract] [Key Words] [Track Full Text] [Subscribe] [Scholar Register] [Received: 12/08/2022] [Revised: 01/15/2023] [Accepted: 01/18/2023] [Indexed: 06/01/2023]
Abstract
This article investigates the dynamical complexity and fractal characteristics changes of the Bitcoin/US dollar (BTC/USD) and Euro/US dollar (EUR/USD) returns in the period before and after the outbreak of the COVID-19 pandemic. More specifically, we applied the asymmetric multifractal detrended fluctuation analysis (A-MF-DFA) method to investigate the temporal evolution of the asymmetric multifractal spectrum parameters. In addition, we examined the temporal evolution of Fuzzy entropy, non-extensive Tsallis entropy, Shannon entropy, and Fisher information. Our research was motivated to contribute to the comprehension of the pandemic's impact and the possible changes it caused in two currencies that play a key role in the modern financial system. Our results revealed that for the overall trend both before and after the outbreak of the pandemic, the BTC/USD returns exhibited persistent behavior while the EUR/USD returns exhibited anti-persistent behavior. Additionally, after the outbreak of COVID-19, there was an increase in the degree of multifractality, a dominance of large fluctuations, as well as a sharp decrease of the complexity (i.e., increase of the order and information content and decrease of randomness) of both BTC/USD and EUR/USD returns. The World Health Organization (WHO) announcement, in which COVID-19 was declared a global pandemic, appears to have had a significant impact on the sudden change in complexity. Our findings can help both investors and risk managers, as well as policymakers, to formulate a comprehensive response to the occurrence of such external events.
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Affiliation(s)
- Pavlos I. Zitis
- Department of Electrical and Electronics Engineering, University of West Attica, Ancient Olive Grove Campus, GR-12241 Aigaleo, Greece
| | - Shinji Kakinaka
- Department of Applied Mathematics and Physics, Graduate School of Informatics, Kyoto University, Sakyo, Kyoto 606-8501, Japan
| | - Ken Umeno
- Department of Applied Mathematics and Physics, Graduate School of Informatics, Kyoto University, Sakyo, Kyoto 606-8501, Japan
| | - Michael P. Hanias
- Department of Physics, International Hellenic University, GR-65404 Kavala, Greece
| | | | - Stelios M. Potirakis
- Department of Electrical and Electronics Engineering, University of West Attica, Ancient Olive Grove Campus, GR-12241 Aigaleo, Greece
- Institute for Astronomy, Astrophysics, Space Applications and Remote Sensing, National Observatory of Athens, Metaxa and Vasileos Pavlou, GR-15236 Penteli, Greece
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4
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Alves PRL. Quantifying chaos in stock markets before and during COVID-19 pandemic from the phase space reconstruction. MATHEMATICS AND COMPUTERS IN SIMULATION 2022; 202:480-499. [PMID: 35937975 PMCID: PMC9339252 DOI: 10.1016/j.matcom.2022.07.026] [Citation(s) in RCA: 0] [Impact Index Per Article: 0] [Reference Citation Analysis] [Abstract] [Key Words] [Track Full Text] [Figures] [Subscribe] [Scholar Register] [Received: 02/20/2021] [Revised: 06/07/2022] [Accepted: 07/26/2022] [Indexed: 06/15/2023]
Abstract
From a methodology in the reconstruction scheme, applicable to chaotic time series of economic indices, this paper presents an analysis of the underlying dynamics of stock markets of North America, Europe and Asia. The same global fit model and reconstruction parameters-employed to study the time evolution of S&P 500, NASDAQ Composite, IBEX 35, EURONEXT 100, Nikkei 225 and SSE Composite Index-led a convenient simplification in the analysis. The tools chosen to analyse the time dependence of the level of chaos concerning weeks of economic activity were scatter plots, histograms and sample Spearman correlation coefficients. The results permit to evaluate the impact of the pandemic in the underlying dynamics of different stock markets and to compare them to one another.
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Affiliation(s)
- P R L Alves
- Fundação de Apoio à Escola Técnica, Escola Técnica Estadual Visconde de Mauá, 21610-210 Rio de Janeiro - RJ, Brazil
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Sheraz M, Dedu S, Preda V. Volatility Dynamics of Non-Linear Volatile Time Series and Analysis of Information Flow: Evidence from Cryptocurrency Data. ENTROPY 2022; 24:1410. [PMCID: PMC9601717 DOI: 10.3390/e24101410] [Citation(s) in RCA: 1] [Impact Index Per Article: 0.5] [Reference Citation Analysis] [Abstract] [Key Words] [Track Full Text] [Subscribe] [Scholar Register] [Received: 09/14/2022] [Accepted: 09/27/2022] [Indexed: 06/01/2023]
Abstract
This paper aims to empirically examine long memory and bi-directional information flow between estimated volatilities of highly volatile time series datasets of five cryptocurrencies. We propose the employment of Garman and Klass (GK), Parkinson’s, Rogers and Satchell (RS), and Garman and Klass-Yang and Zhang (GK-YZ), and Open-High-Low-Close (OHLC) volatility estimators to estimate cryptocurrencies’ volatilities. The study applies methods such as mutual information, transfer entropy (TE), effective transfer entropy (ETE), and Rényi transfer entropy (RTE) to quantify the information flow between estimated volatilities. Additionally, Hurst exponent computations examine the existence of long memory in log returns and OHLC volatilities based on simple R/S, corrected R/S, empirical, corrected empirical, and theoretical methods. Our results confirm the long-run dependence and non-linear behavior of all cryptocurrency’s log returns and volatilities. In our analysis, TE and ETE estimates are statistically significant for all OHLC estimates. We report the highest information flow from BTC to LTC volatility (RS). Similarly, BNB and XRP share the most prominent information flow between volatilities estimated by GK, Parkinson’s, and GK-YZ. The study presents the practicable addition of OHLC volatility estimators for quantifying the information flow and provides an additional choice to compare with other volatility estimators, such as stochastic volatility models.
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Affiliation(s)
- Muhammad Sheraz
- Department of Mathematical Sciences, Institute of Business Administration, The School of Mathematics and Computer Science, Karachi 75270, Pakistan
- Department of Financial Mathematics, Fraunhofer ITWM, 67663 Kaiserslautern, Germany
| | - Silvia Dedu
- Department of Applied Mathematics, Bucharest University of Economic Studies, 010734 Bucharest, Romania
| | - Vasile Preda
- Faculty of Mathematics and Computer Science, University of Bucharest, Academiei 14, 010014 Bucharest, Romania
- “Gheorghe Mihoc-Caius Iacob” Institute of Mathematical Statistics and Applied Mathematics of Romanian Academy, 2. Calea 13 Septembrie, nr. 13, Sect. 5, 050711 Bucharest, Romania
- “Costin C. Kiritescu” National Institute of Economic Research of Romanian Academy, 3. Calea 13 Septembrie, nr. 13, Sect. 5, 050711 Bucharest, Romania
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6
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Have returns and volatilities for financial assets responded to implied volatility during the COVID-19 pandemic? JOURNAL OF COMMODITY MARKETS 2022. [PMCID: PMC9765873 DOI: 10.1016/j.jcomm.2021.100194] [Citation(s) in RCA: 0] [Impact Index Per Article: 0] [Reference Citation Analysis] [Abstract] [Key Words] [Track Full Text] [Subscribe] [Scholar Register] [Indexed: 05/06/2023]
Abstract
This paper uses transfer entropy measures to analyze the information sharing between the option implied volatility, the realized volatility and the returns of six financial assets during the COVID-19 pandemic. The measures indicate increases in the information transmissions during the pandemic which are uniform across the volatilities and the returns of all assets. In these transmissions, the option implied volatilities are found to play the central role, particularly in the returns of the assets as opposed to its realized volatilities. Thus, we may conclude that the predictability of the volatilities derived from option pricing models has improved during the pandemic and that this improvement has reduced the uncertainty of the future returns and the volatilities, albeit to a lower extent. These findings bear implications for constructing models that predict volatilities and returns during crises periods.
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Novais RG, Wanke P, Antunes J, Tan Y. Portfolio Optimization with a Mean-Entropy-Mutual Information Model. ENTROPY 2022; 24:e24030369. [PMID: 35327880 PMCID: PMC8947404 DOI: 10.3390/e24030369] [Citation(s) in RCA: 3] [Impact Index Per Article: 1.5] [Reference Citation Analysis] [Abstract] [Track Full Text] [Download PDF] [Figures] [Subscribe] [Scholar Register] [Received: 01/11/2022] [Revised: 02/13/2022] [Accepted: 02/26/2022] [Indexed: 01/27/2023]
Abstract
This paper describes a new model for portfolio optimization (PO), using entropy and mutual information instead of variance and covariance as measurements of risk. We also compare the performance in and out of sample of the original Markowitz model against the proposed model and against other state of the art shrinkage methods. It was found that ME (mean-entropy) models do not always outperform their MV (mean-variance) and robust counterparts, although presenting an edge in terms of portfolio diversity measures, especially for portfolio weight entropy. It further shows that when increasing return constraints on portfolio optimization, ME models were more stable overall, showing dampened responses in cumulative returns and Sharpe indexes in comparison to MV and robust methods, but concentrated their portfolios more rapidly as they were more evenly spread initially. Finally, the results suggest that it was also shown that, depending on the market, increasing return constraints may have positive or negative impacts on the out-of-sample performance.
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Affiliation(s)
- Rodrigo Gonçalves Novais
- COPPEAD Graduate Business School, Federal University of Rio de Janeiro, Rio de Janeiro 21941-918, Brazil; (R.G.N.); (P.W.); (J.A.)
| | - Peter Wanke
- COPPEAD Graduate Business School, Federal University of Rio de Janeiro, Rio de Janeiro 21941-918, Brazil; (R.G.N.); (P.W.); (J.A.)
| | - Jorge Antunes
- COPPEAD Graduate Business School, Federal University of Rio de Janeiro, Rio de Janeiro 21941-918, Brazil; (R.G.N.); (P.W.); (J.A.)
| | - Yong Tan
- School of Management, University of Bradford, Bradford BD7 1DP, West Yorkshire, UK
- Correspondence:
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Lahmiri S, Bekiros S. The effect of COVID-19 on long memory in returns and volatility of cryptocurrency and stock markets. CHAOS, SOLITONS, AND FRACTALS 2021; 151:111221. [PMID: 36568907 PMCID: PMC9759418 DOI: 10.1016/j.chaos.2021.111221] [Citation(s) in RCA: 4] [Impact Index Per Article: 1.3] [Reference Citation Analysis] [Abstract] [Key Words] [Track Full Text] [Subscribe] [Scholar Register] [Received: 06/08/2021] [Accepted: 06/23/2021] [Indexed: 05/26/2023]
Abstract
We examine long memory (self-similarity) in digital currencies and international stock exchanges prior and during COVID-19 pandemic. Specifically, ARFIMA and FIGARCH models are respectively employed to evaluate long memory parameter in returns and volatility. The dataset contains 45 cryptocurrency markets and 16 international equity markets. The t-test and F-test are performed to estimated long memory parameters. The empirical findings follow. First, the level of persistence in return series of both markets has increased during the COVID-19 pandemic. Second, during COVID-19 pandemic, variability level in persistence in return series has increased in both digital currencies and stock markets. Third, return series in both markets exhibited comparable level of persistence prior and during the COVID-19 pandemic. Fourth, return series in volatility series of cryptocurrency exhibited high degree of persistence compared to international stock markets during the COVID-19 pandemic. Therefore, it is concluded that COVID-19 pandemic significantly affected long memory in return and volatility of cryptocurrency and international stock markets. In addition, our results suggest that the hybrid long memory model represented by the integration of ARFIMA-FIGARCH is significantly suitable to describe returns and volatility of cryptocurrencies and stocks and to reveal differences before and during COVID-19 pandemic periods.
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Affiliation(s)
- Salim Lahmiri
- Chaire innovation et économie numérique, ESCA École de Management, Casablanca, Morocco
| | - Stelios Bekiros
- Department of Banking and Finance, FEMA, University of Malta, Malta
- Department of Economics, European University Institute, Florence, Italy
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Gunay S. Comparing COVID-19 with the GFC: A shockwave analysis of currency markets. RESEARCH IN INTERNATIONAL BUSINESS AND FINANCE 2021; 56:101377. [PMID: 36540770 PMCID: PMC9756040 DOI: 10.1016/j.ribaf.2020.101377] [Citation(s) in RCA: 4] [Impact Index Per Article: 1.3] [Reference Citation Analysis] [Abstract] [Key Words] [Track Full Text] [Subscribe] [Scholar Register] [Received: 07/26/2020] [Revised: 12/01/2020] [Accepted: 12/14/2020] [Indexed: 05/20/2023]
Abstract
I analyze the shockwave effect of the COVID-19 pandemic on currency markets, with a comparison to the global financial crisis (GFC), employing Kapetanios m-break unit root test, investigations of standalone risk measures-downside variance, upside risk, volatility skewness, Gaussian Value at Risk (VaR), historical VaR, modified VaR-and Diebold-Yilmaz volatility spillover analysis. Standalone risk analysis shows that the turmoil in the initial months of COVID-19 was not as severe as that in the GFC. However, examination of co-movements and volatility spillovers illustrates a different scenario. According to the results of the static connectedness measure of Diebold-Yilmaz, the shockwave of the COVID-19 pandemic in the total volatility spillover is about eight times greater than that of the GFC. Among standalone risk measures, the results closest to this finding are obtained from volatility skewness analysis. Additionally, of six foreign exchange rates, the Brazilian real and Turkish lira are the currencies experiencing the greatest increase in received volatility during the GFC and the COVID-19 pandemic, respectively. These findings suggest the severe effect of crises on emerging financial markets.
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Affiliation(s)
- Samet Gunay
- American University of the Middle East, Kuwait
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10
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Kamaludin K, Sundarasen S, Ibrahim I. Covid-19, Dow Jones and equity market movement in ASEAN-5 countries: evidence from wavelet analyses. Heliyon 2021; 7:e05851. [PMID: 33506122 PMCID: PMC7814110 DOI: 10.1016/j.heliyon.2020.e05851] [Citation(s) in RCA: 8] [Impact Index Per Article: 2.7] [Reference Citation Analysis] [Abstract] [Key Words] [Track Full Text] [Download PDF] [Figures] [Journal Information] [Subscribe] [Scholar Register] [Received: 07/13/2020] [Revised: 11/20/2020] [Accepted: 12/22/2020] [Indexed: 12/01/2022] Open
Abstract
This study gains insights into what drives the ASEAN-5 equity markets. Using several wavelet approaches, we examine the correlation between the ASEAN-5 equity markets with the daily new Covid-19 cases and the Dow Jones Industrial Average (DowJones), the lead-lag relationships and level of disorder (or randomness) between the ASEAN-5 domestic equity markets and DowJones between February 15 to May 30, 2019 (pre-period) and February 15 to May 30, 2020 (during the pandemic period) respectively. The pandemic period is further divided into three different phases; the beginning (February), mid (March and April), and end (May) of the period. This study finds that Malaysia, Indonesia, and Singapore equity markets react to Covid-19 cases at the beginning of the pandemic phase, whereas, Thailand and the Philippines showed coherency during the mid-period. As the pandemic progresses (mid-period), all ASEAN-5 equity markets exhibited strong coherence with the DowJones Index. However, at the end of the sample period, no coherency was observed among the ASEAN-5 equity markets, local Covid-19 cases, and DowJones index. This study has two main contributions to the literature: First, we provide insights on equity markets' reactions during an epidemic/pandemic crisis in the emerging markets, specifically, the ASEAN-5 countries, which is a less studied area. Second, examining the impact of the Covid-19 and DowJones Index on the ASEAN-5 equity markets using the wavelet method is a novel approach that captures both the time and frequency dimensions. The results of this study have a significant contribution to investors and regulators, particularly in navigating the new 'normal' and data-driven era.
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Affiliation(s)
- Kamilah Kamaludin
- Department of Accounting, College of Business Administration, Prince Sultan University, Saudi Arabia
| | - Sheela Sundarasen
- Department of Accounting, College of Business Administration, Prince Sultan University, Saudi Arabia
| | - Izani Ibrahim
- Department of Finance, College of Business Administration, Prince Sultan University, Saudi Arabia
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11
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Lahmiri S, Bekiros S. Randomness, Informational Entropy, and Volatility Interdependencies among the Major World Markets: The Role of the COVID-19 Pandemic. ENTROPY 2020; 22:e22080833. [PMID: 33286604 PMCID: PMC7517433 DOI: 10.3390/e22080833] [Citation(s) in RCA: 21] [Impact Index Per Article: 5.3] [Reference Citation Analysis] [Abstract] [Key Words] [Track Full Text] [Download PDF] [Figures] [Subscribe] [Scholar Register] [Received: 06/29/2020] [Revised: 07/23/2020] [Accepted: 07/27/2020] [Indexed: 12/23/2022]
Abstract
The main purpose of our paper is to evaluate the impact of the COVID-19 pandemic on randomness in volatility series of world major markets and to examine its effect on their interconnections. The data set includes equity (Bitcoin and Standard and Poor’s 500), precious metals (Gold and Silver), and energy markets (West Texas Instruments, Brent, and Gas). The generalized autoregressive conditional heteroskedasticity model is applied to the return series. The wavelet packet Shannon entropy is calculated from the estimated volatility series to assess randomness. Hierarchical clustering is employed to examine interconnections between volatilities. We found that (i) randomness in volatility of the S&P500 and in the volatility of precious metals were the most affected by the COVID-19 pandemic, while (ii) randomness in energy markets was less affected by the pandemic than equity and precious metal markets. Additionally, (iii) we showed an apparent emergence of three volatility clusters: precious metals (Gold and Silver), energy (Brent and Gas), and Bitcoin and WTI, and (iv) the S&P500 volatility represents a unique cluster, while (v) the S&P500 market volatility was not connected to the volatility of Bitcoin, energy, and precious metal markets before the pandemic. Moreover, (vi) the S&P500 market volatility became connected to volatility in energy markets and volatility in Bitcoin during the pandemic, and (vii) the volatility in precious metals is less connected to volatility in energy markets and to volatility in Bitcoin market during the pandemic. It is concluded that (i) investors may diversify their portfolios across single constituents of clusters, (ii) investing in energy markets during the pandemic period is appealing because of lower randomness in their respective volatilities, and that (iii) constructing a diversified portfolio would not be challenging as clustering structures are fairly stable across periods.
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Affiliation(s)
- Salim Lahmiri
- Department of Supply Chain & Business Technology Management, John Molson School of Business, Concordia University, Montreal, QC H3H 0A1, Canada;
| | - Stelios Bekiros
- Department of Economics, European University Institute, 50014 Florence, Italy
- Rimini Centre for Economic Analysis, Wilfrid Laurier University, 75 University Ave W., Waterloo, ON N2L 3C5, Canada
- Correspondence:
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