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

Author

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  • Renée Fry-McKibbin
  • Cody Yu-Ling Hsiao
  • Vance L. Martin

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.

Suggested Citation

  • Renée Fry-McKibbin & Cody Yu-Ling Hsiao & Vance L. Martin, 2018. "Measuring financial interdependence in asset returns with an application to euro zone equities," CAMA Working Papers 2018-05, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  • Handle: RePEc:een:camaaa:2018-05
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    More about this item

    Keywords

    Entropy theory; generalized exponential family; higher order comoment decomposition; independence testing;
    All these keywords.

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • F30 - International Economics - - International Finance - - - General

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