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

Author

Listed:
  • F. Benedetto

    (“Roma Tre” University)

  • L. Mastroeni

    (“Roma Tre” University)

  • P. Vellucci

    (“Roma Tre” University)

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.

Suggested Citation

  • F. Benedetto & L. Mastroeni & P. Vellucci, 2021. "Modeling the flow of information between financial time-series by an entropy-based approach," Annals of Operations Research, Springer, vol. 299(1), pages 1235-1252, April.
    • Handle: RePEc:spr:annopr:v:299:y:2021:i:1:d:10.1007_s10479-019-03319-7
    DOI: 10.1007/s10479-019-03319-7
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    More about this item

    Keywords

    Information content; Modeling; Financial time-series; Volatility indexes; Crude oil spot prices; Entropy-based analysis;
    All these keywords.

    JEL classification:

    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • Q47 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy Forecasting

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