Abstract

In this paper we study the evolution of the informational efficiency in its weak form for seventeen European sovereign bonds time series. We aim to assess the impact of two specific economic situations in the hypothetical random behavior of these time series: the establishment of a common currency and a wide and deep financial crisis. In order to evaluate the informational efficiency we use permutation quantifiers derived from information theory. Specifically, time series are ranked according to two metrics that measure the intrinsic structure of their correlations: permutation entropy and permutation statistical complexity. These measures provide the rectangular coordinates of the complexity-entropy causality plane; the planar location of the time series in this representation space reveals the degree of informational efficiency. According to our results, the currency union contributed to homogenize the stochastic characteristics of the time series and produced synchronization in the random behavior of them. Additionally, the 2008 financial crisis uncovered differences within the apparently homogeneous European sovereign markets and revealed country-specific characteristics that were partially hidden during the monetary union heyday.

Highlights

  • The study of informational efficiency is a classic topic in financial economics

  • With the estimated permutation entropy values for all the different countries for each sliding window, we evaluate the mean and standard deviation of the permutation entropy as a function of time

  • The results of the analysis performed with sliding windows confirm the fact that the common currency and the 2008 financial crisis affected the synchronization of the European markets

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Summary

Introduction

The study of informational efficiency is a classic topic in financial economics. According to the usual definition of Fama [1], a market is informationally efficient if prices reflect all relevant information. The most demanding definition of informational efficiency is its strong form, where the validation set is all kind of information (both public and private). It has been extensively documented in both developed and emerging markets, that informational efficiency, at least in its weak form, is not constant through time [2]. Bariviera et al [6] find that long-term memory in some European markets was affected by the 2008 credit crunch. The aim of this paper is to study the evolution of the informational efficiency of seventeen European sovereign bond indices.

Financial integration: a brief review
Entropy and statistical complexity
Complexity-entropy plane
Estimation of the probability distribution function
16 Poland
Conclusions

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