Abstract
This paper applies effective transfer entropy to research the information transfer in the Chinese stock market around its crash in 2015. According to the market states, the entire period is divided into four sub-phases: the tranquil, bull, crash, and post-crash periods. Kernel density estimation is used to calculate the effective transfer entropy. Then, the information transfer network is constructed. Nodes’ centralities and the directed maximum spanning trees of the networks are analyzed. The results show that, in the tranquil period, the information transfer is weak in the market. In the bull period, the strength and scope of the information transfer increases. The utility sector outputs a great deal of information and is the hub node for the information flow. In the crash period, the information transfer grows further. The market efficiency in this period is worse than that in the other three sub-periods. The information technology sector is the biggest information source, while the consumer staples sector receives the most information. The interactions of the sectors become more direct. In the post-crash period, information transfer declines but is still stronger than the tranquil time. The financial sector receives the largest amount of information and is the pivot node.
Highlights
After decades of rapid growth, China has become the world’s second largest economy
We calculate the effective transfer entropy (ETE) between 10 Chinese stock sectors during the four sub-periods
Using ETE and the 10 sectors’ data from July 2013 to February 2017, this paper studies the information transfer in the Chinese stock market around its crash in 2015
Summary
After decades of rapid growth, China has become the world’s second largest economy. It plays an important role in global trade. The Shanghai stock exchange composite index (SSECI) soared from 2050.38 on 1 July 2014, to a peak of 5166.35 on 12 June 2015. It increased about 152% in just one year. From late June to late August of 2015, the SSECI declined about 40% [4] It was one of the biggest falls in global stock market history [2]. The market turbulence ended in February 2016 [5] This crash brought heavy losses to Chinese investors and the economy.
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