Title: Measuring financial interdependence in asset returns with an application to Euro Zone equities
Authors: Cody Yu-Ling Hsiao - Macau University of Science and Technology (China) [presenting]
Renee Fry-McKibbin - The Australian National University (Austria)
Vance Martin - University of Melbourne (Australia)
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 co-moments including co-skewness, co-kurtosis and co-volatility 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 co-moments. 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.