Modeling the flow of information between financial time-series by an entropy-based approach

F. Benedetto (), L. Mastroeni () and P. Vellucci ()
Additional contact information
F. Benedetto: “Roma Tre” University
L. Mastroeni: “Roma Tre” University
P. Vellucci: “Roma Tre” University

Annals of Operations Research, 2021, vol. 299, issue 1, No 49, 1235-1252

Abstract: Abstract Recent literature has been documented that commodity prices have become more and more correlated with prices of financial assets. Hence, it would be crucial to understand how the amount of information contained in one time series (i.e. commodity prices) reflects on the other one (i.e. financial asset prices). Here, we address these issues by means of an entropy-based approach. In particular, we define two new metrics, namely the Joined Entropy and the Mutual Information, to analyze and model how the information content is (mutually) exchanged between two time series under investigation. The experimental outcomes, applied on volatility indexes, oil and natural gas prices for the period 01/04/1999–01/02/2015, prove the effectiveness of the proposed method in modeling the information flows between the analyzed data.

Keywords: Information content; Modeling; Financial time-series; Volatility indexes; Crude oil spot prices; Entropy-based analysis (search for similar items in EconPapers)
JEL-codes: C53 C63 G14 Q47 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (2)

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DOI: 10.1007/s10479-019-03319-7

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