Measuring financial interdependence in asset returns with an application to euro zone equities
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.
Updated: 19 August 2024/Responsible Officer: Crawford Engagement/Page Contact: CAMA admin