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Using Entropy to Evaluate the Impact of Monetary Policy Shocks on Financial Networks |
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| Authors: | Petre Caraiani Alexandru Vasile Lazarec |
| Affiliation: | 1.Institute for Economic Forecasting, Romanian Academy, 050711 Bucharest, Romania;2.Faculty of Business Administration in Foreign Languages, Bucharest University of Economic Studies, 010374 Bucharest, Romania;3.Department of Economics, Sociology and Law, The School of Advanced Studies of the Romanian Academy, 010071 Bucharest, Romania |
| Abstract: | We analyze the changes in the financial network built using the Dow Jones Industrial Average components following monetary policy shocks. Monetary policy shocks are measured through unexpected changes in the federal funds rate in the United States. We determine the changes in the financial networks using singular value decomposition entropy and von Neumann entropy. The results indicate that unexpected positive shocks in monetary policy shocks lead to lower entropy. The results are robust to varying the window size used to construct financial networks, though they also depend on the type of entropy used. |
| Keywords: | entropy financial markets monetary policy networks |