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

Vol: 
5/2018
Author name: 
Fry-McKibbin R
Hsiao CYL
Martin VL
Year: 
2018
Month: 
January
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.

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