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Information transfer across intra/inter-structure of CDS and stock markets

Kyuseong Lim, Sehyun Kim and Soo Yong Kim

Physica A: Statistical Mechanics and its Applications, 2017, vol. 486, issue C, 118-126

Abstract: We investigate the information flow between industrial sectors in credit default swap and stock markets in the United States based on transfer entropy. Both markets have been studied with respect to dynamics and relations. Our approach considers the intra-structure of each financial market as well as the inter-structure between two markets through a moving window in order to scan a period from 2005 to 2012. We examine the information transfer with different k, especially k=3, k=5 and k=7. Analysis indicates that the cases with k=3 and k=7 show the opposite trends but similar characteristics. Change in transfer entropy for intra-structure of CDS market precedes that of stock market in view of the entire time windows. Abrupt rise and fall in inter-structural information transfer between two markets are detected at the periods related to the financial crises, which can be considered as early warnings.

Keywords: Transfer entropy; Credit default swap; Information flow; Econophysics (search for similar items in EconPapers)
Date: 2017
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Physica A: Statistical Mechanics and its Applications is currently edited by K. A. Dawson, J. O. Indekeu, H.E. Stanley and C. Tsallis

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