Effective transfer entropy to measure information flows in credit markets

Abstract In this paper we propose to study the dynamics of financial contagion between credit default swap (CDS) and sovereign bond markets through effective transfer entropy, a model-free methodology which enables overcome required hypotheses classical price discovery measures in statistical econometric literature, without being restricted linear dynamics. By means entropy correct for small sample biases affect traditional Shannon as well are able conduct inference on estimated directional information flows. our empirical application, analyze CDS market data eight countries European Union, aim discover two assets is faster at incorporating risk underlying sovereign. Our results show clear statistically significant prominence pricing risk, especially during crisis period. During post-crisis period, instead, few behave dissimilarly from others, particular Spain Netherlands.