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

Paweł Fiedor

doi:10.1140/epjb/e2014-50108-3

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The European Physical Journal B

August 2014, 87:168

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

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Paweł FiedorEmail author

Open Access

Regular Article

First Online:: 01 August 2014

Received:: 16 February 2014
Revised:: 28 April 2014

DOI: 10.1140/epjb/e2014-50108-3

Cite this article as:: Fiedor, P. Eur. Phys. J. B (2014) 87: 168. doi:10.1140/epjb/e2014-50108-3

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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 types of analysis are concentrated mostly on Pearson’s correlation coefficient and consequently intraday lead-lag relationships (where one of the variables in a pair is time-lagged) are also associated with them. Under the Efficient-Market Hypothesis such relationships are not possible as all information is embedded in the prices, but in real markets we find such dependencies. 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. Mutual information is not only 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 New York Stock Exchange 100 data not only on an intraday level, but also for daily stock returns, which have usually been ignored.

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Statistical and Nonlinear Physics

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

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