Information flow among stocks, bonds, and convertible bonds

Area of Science:

• Financial Economics
• Market Dynamics
• Information Theory

Background:

• Understanding information flow between financial assets is crucial for market stability and investment strategies.
• Traditional methods like Granger causality have limitations due to strict assumptions.
• Convertible bonds (CBs) represent a unique asset class influenced by both equity and debt markets.

Purpose of the Study:

• To investigate the dynamic information flow between convertible bonds, stocks, and bonds.
• To employ transfer entropy (TE) as a robust measure of causal effects, overcoming limitations of traditional methods.
• To analyze how macroeconomic phases influence the direction and significance of information exchange.

Main Methods:

• Utilized transfer entropy (TE) to quantify information flow between asset classes.
• Analyzed return and price series data for convertible bonds, stocks, and bonds.
• Segmented data analysis based on distinct macroeconomic phases (pre-crisis, during crisis, post-crisis).

Main Results:

• Asymmetric information flow between assets is contingent on macroeconomic conditions.
• Stock markets influenced CBs pre-crisis; bond markets influenced CBs during the global financial crisis.
• No significant information exchange was found in return series during the post-crisis period.
• A notable cause-effect relationship emerged between CBs and stocks in price fluctuation patterns post-crisis.

Conclusions:

• The directionality of information flow is dependent on macroeconomic context and data type (returns vs. price patterns).
• Investors can leverage predictable information flow patterns for enhanced portfolio management.
• Policymakers should monitor inter-market information flow to prevent market distortions and regulatory arbitrage, especially during high integration.