Premium
Permutation entropies of short‐term interest rates as an early‐warning signal
Author(s) -
Lee Daeyup,
Park Hail
Publication year - 2019
Publication title -
international finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.458
H-Index - 39
eISSN - 1468-2362
pISSN - 1367-0271
DOI - 10.1111/infi.12348
Subject(s) - economics , interest rate , term (time) , financial crisis , monetary economics , warning system , econometrics , financial economics , keynesian economics , computer science , telecommunications , physics , quantum mechanics
This paper proposes a new method for detecting abnormal movements of short‐term interest rates by using permutation entropy (PE) as a complementary early‐warning signal. Empirical results have shown that the PEs of the US T‐Bill rates plunged below the thresholds of normal movements before the nancial crisis of 2007–2009, and the PE of 3‐month Euribor similarly dropped before the European sovereign debt crisis of 2010. Additionally, it was found that the PEs of spreads of both domestic interest rates and Libors dropped against the US T‐Bill rates below the thresholds in 2005. This evidence could serve as useful information for policymakers in crisis periods.