Rényi’s information transfer between financial time series

Petr Jizba, Hagen Kleinert and Mohammad Shefaat

Physica A: Statistical Mechanics and its Applications, 2012, vol. 391, issue 10, 2971-2989

Abstract: In this paper, we quantify the statistical coherence between financial time series by means of the Rényi entropy. With the help of Campbell’s coding theorem, we show that the Rényi entropy selectively emphasizes only certain sectors of the underlying empirical distribution while strongly suppressing others. This accentuation is controlled with Rényi’s parameter q. To tackle the issue of the information flow between time series, we formulate the concept of Rényi’s transfer entropy as a measure of information that is transferred only between certain parts of underlying distributions. This is particularly pertinent in financial time series, where the knowledge of marginal events such as spikes or sudden jumps is of a crucial importance. We apply the Rényian information flow to stock market time series from 11 world stock indices as sampled at a daily rate in the time period 02.01.1990–31.12.2009. Corresponding heat maps and net information flows are represented graphically. A detailed discussion of the transfer entropy between the DAX and S&P500 indices based on minute tick data gathered in the period 02.04.2008–11.09.2009 is also provided. Our analysis shows that the bivariate information flow between world markets is strongly asymmetric with a distinct information surplus flowing from the Asia–Pacific region to both European and US markets. An important yet less dramatic excess of information also flows from Europe to the US. This is particularly clearly seen from a careful analysis of Rényi information flow between the DAX and S&P500 indices.

Keywords: Econophysics; Rényi entropy; Information transfer; Financial time series (search for similar items in EconPapers)
Date: 2012
References: View complete reference list from CitEc
Citations: View citations in EconPapers (26)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:phsmap:v:391:y:2012:i:10:p:2971-2989

DOI: 10.1016/j.physa.2011.12.064

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