Exploring information flow of return and volatility from major markets to Vietnam: further insights from transfer entropy method approach

Abstract

This research paper uses Arch/ Garch model and transfer entropy to compute the volatility of daily return of stock indice and measure the information flows from major markets such as price movements, fluctuations in exchange rates (USD/EUR), WTI crude oil and stock markets to Vietnam, respectively. It also analyzes and examines the impact of the crisis (Brexit) on the one-way flow of information from major markets to Vietnam. The author conducts the analyses for pre-crisis and post-crisis periods. Theoretically, Transfer entropy is a model-free methodology created by the Kullback-Leibler distance of transition probabilities. The data analyzed are average daily returns of stock indices of major markets in the world and Vietnam for the period from January 2010 to June 2023 with a total sample of 4914. The findings show that the US market is the market with the most significant flow of information and the highest transfer entropy throughout the review periods. Based on the paper result, investor can apply transfer entropy to predict the tendency of stock price during periods of economic recovery or crisis, thereby choosing an appropriate investment portfolio.