Foreign exchange rate entropy evolution during financial crises

Darko Stosic, Dusan Stosic, Teresa Ludermir, Wilson de Oliveira and Tatijana Stosic

Physica A: Statistical Mechanics and its Applications, 2016, vol. 449, issue C, 233-239

Abstract: This paper examines the effects of financial crises on foreign exchange (FX) markets, where entropy evolution is measured for different exchange rates, using the time-dependent block entropy method. Empirical results suggest that financial crises are associated with significant increase of exchange rate entropy, reflecting instability in FX market dynamics. In accordance with phenomenological expectations, it is found that FX markets with large liquidity and large trading volume are more inert — they recover quicker from a crisis than markets with small liquidity and small trading volume. Moreover, our numerical analysis shows that periods of economic uncertainty are preceded by periods of low entropy values, which may serve as a tool for anticipating the onset of financial crises.

Keywords: Foreign exchange rates; Financial crisis; Shannon entropy; Time-dependent entropy (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (23)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:phsmap:v:449:y:2016:i:c:p:233-239

DOI: 10.1016/j.physa.2015.12.124

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