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Modeling the Comovement of Entropy between Financial Markets
1Institute for Economic Forecasting, Romanian Academy, 050711 Bucharest, Romania.
Abstract:
In this paper, I propose a methodology to study the comovement between the entropy of different financial markets. The entropy is derived using singular value decomposition of the components of stock market indices in financial markets from selected developed economies, i.e., France, Germany, the United Kingdom, and the United States. I study how a shock in the entropy in the United States affects the entropy in the other financial markets. I also model the entropy using a dynamic factor model and derive a common factor behind the entropy movements in these four markets.
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