Correlations of multiscale entropy in the FX market

Abstract

Abstract The regularity of price fluctuations in exchange rates plays a crucial role in FX market dynamics. Distinct variations in regularity arise from economic, social and political events, such as interday trading and financial crisis. This paper applies a multiscale time-dependent entropy method on thirty-three exchange rates to analyze price fluctuations in the FX. Correlation matrices of entropy values, termed entropic correlations, are in turn used to describe global behavior of the market. Empirical results suggest a weakly correlated market with pronounced collective behavior at bi-weekly trends. Correlations arise from cycles of low and high regularity in long-term trends. Eigenvalues of the correlation matrix also indicate a dominant European market, followed by shifting American, Asian, African, and Pacific influences. As a result, we find that entropy is a powerful tool for extracting important information from the FX market.