Information flow between composite stock index and individual stocks

TL;DR

This paper uses transfer entropy to analyze the information flow in the U.S. stock market, revealing that individual stock prices are influenced by the market index, highlighting the directional influence within financial data.

Contribution

It introduces transfer entropy analysis to quantify the directional information transfer between the market index and individual stocks.

Findings

Individual stocks are influenced by the market index.

Information transfer is predominantly from the index to stocks.

The method reveals the directionality of influence in stock market data.

Abstract

We investigate the strength and the direction of information transfer in the U.S. stock market between the composite stock price index of stock market and prices of individual stocks using the transfer entropy. Through the directionality of the information transfer, we find that individual stocks are influenced by the index of the market.