Using Transfer Entropy to Measure Information Flows Between Financial Markets

Posted: 29 Sep 2010 Last revised: 18 Apr 2017

See all articles by Franziska J. Peter

Franziska J. Peter

Eberhard Karls Universität Tübingen

Thomas Dimpfl

University of Tuebingen - Department of Statistics and Econometrics

Date Written: September 28, 2010

Abstract

We apply the concept of transfer entropy to quantify information flows between financial time series. Transfer entropy is a model-free measure designed as the Kullback-Leibler distance of transition probabilities. This approach allows to determine information transfer without being restricted to linear dynamics. We further develop a bootstrap procedure in order to allow for statistical inference of the estimates. In our empirical application, we examine the importance of the CDS and bond market for the process of pricing credit risk as well as the dynamic relation between market risk and credit risk proxied by the iTraxx Europe and the VIX.

Keywords: CDS, entropy, information flow, non-linear dynamics, price discovery

JEL Classification: C14, G15

Suggested Citation

Peter, Franziska Julia and Dimpfl, Thomas, Using Transfer Entropy to Measure Information Flows Between Financial Markets (September 28, 2010). Midwest Finance Association 2012 Annual Meetings Paper, Available at SSRN: https://ssrn.com/abstract=1683948 or http://dx.doi.org/10.2139/ssrn.1683948

Franziska Julia Peter (Contact Author)

Eberhard Karls Universität Tübingen ( email )

Mohlstrasse 36
72074 Tuebingen, Baden Wuerttemberg 72074
Germany

Thomas Dimpfl

University of Tuebingen - Department of Statistics and Econometrics ( email )

Germany

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