The Impact of Financial and Macroeconomic Shocks on the Entropy of Financial Markets

Abstract

We propose here a method to analyze whether financial and macroeconomic shocks influence the entropy of financial networks. We derive a measure of entropy using the correlation matrix of the stock market components of the DOW Jones Industrial Average (DJIA) index. Using VAR models in different specifications, we show that shocks in production or the DJIA index lead to an increase in the entropy of the financial markets.

Keywords

• entropy
• financial markets
• monetary policy
• networks