Randomness, Informational Entropy, and Volatility Interdependencies among the Major World Markets: The Role of the...

Area of Science:

• Financial Economics
• Econometrics
• Complexity Science

Background:

• The COVID-19 pandemic introduced unprecedented volatility across global financial markets.
• Understanding shifts in market randomness and interconnections is crucial for risk management and investment strategies.

Purpose of the Study:

• To evaluate the COVID-19 pandemic's impact on volatility randomness in major global markets.
• To examine how the pandemic affected interconnections between equity, precious metal, and energy market volatilities.

Main Methods:

• Generalized Autoregressive Conditional Heteroskedasticity (GARCH) models were applied to return series.
• Wavelet Packet Shannon Entropy was used to quantify randomness in estimated volatility.
• Hierarchical clustering analyzed interconnections between market volatilities.

Main Results:

• S&P 500 and precious metal volatilities exhibited the highest pandemic-induced randomness changes.
• Energy market volatility randomness was less affected compared to equity and precious metals.
• Three distinct volatility clusters emerged: precious metals, energy, and Bitcoin/WTI, with S&P 500 forming a unique cluster.
• S&P 500 volatility became interconnected with energy and Bitcoin markets during the pandemic, unlike the pre-pandemic period.

Conclusions:

• Investors can diversify portfolios by selecting assets within identified volatility clusters.
• Energy markets presented an appealing investment during the pandemic due to lower volatility randomness.
• Portfolio diversification remains feasible due to the relative stability of market clustering structures.