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Measuring financial interdependence in asset returns with an application to euro zone equities

Renee Fry-McKibbin (), Cody Yu-Ling Hsiao () and Vance L. Martin

CAMA Working Papers from Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University

Abstract: A general procedure is proposed to identify changes in asset return interdependence over time using entropy theory. The approach provides a decomposition of interdependence in terms of comoments including coskewness, cokurtosis and covolatility as well as more traditional measures based on second order moments such as correlations. A new diagnostic test of independence is also developed which incorporates these higher order comoments. The properties of the entropy interdependence measure are demonstrated using a number of simulation experiments, as well as applying the methodology to euro zone equity markets over the period 1990 to 2017.

Keywords: Entropy theory; generalized exponential family; higher order comoment decomposition; independence testing (search for similar items in EconPapers)
JEL-codes: C12 F30 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ecm
Date: 2018-01
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Persistent link: https://EconPapers.repec.org/RePEc:een:camaaa:2018-05

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