Information-theoretic approach to lead-lag effect on financial markets

Abstract

Recently the interest of researchers has shifted from the analysis of synchronous relationships of financial instruments to the analysis of more meaningful asynchronous relationships. Both of those analyses are concentrated only on Pearson's correlation coefficient and thus intraday lead-lag relationships associated with such. Under Efficient Market Hypothesis such relationships are not possible as all information is embedded in the prices. In this paper we analyse lead-lag relationships of financial instruments and extend known methodology by using mutual information instead of Pearson's correlation coefficient, which not only is a more general measure, sensitive to non-linear dependencies, but also can lead to a simpler procedure of statistical validation of links between financial instruments. We analyse lagged relationships using NYSE 100 data not only on intraday level but also for daily stock returns, which has usually been ignored.

9 pages, 19 figures

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Cited by in corpus (6)

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• Spectra of large time-lagged correlation matrices from Random Matrix Theory
• Partial Mutual Information Analysis of Financial Networks
• Emerging interdependence between stock values during financial crashes
• Detecting imbalanced financial markets through time-varying optimization and nonlinear functionals
• On financial market correlation structures and diversification benefits across and within equity sectors