Does the dynamics between government bond and equity markets validate the adaptive market hypothesis? evidence from transfer entropy

The study applies the effective transfer entropy (ETE) and Renyi transfer entropy (RTE) to quantify the information flow between government bonds and equity market of G7 countries. The magnitude and direction of information flow between these two markets are dynamic across the state of the markets and time thus confirming their adaptiveness to the evolution of cross-market information flow under different market conditions over time. Although information flow from the equity dominates the flow from the bond market, it is dynamic over the time and state of the markets. However, during the period of market turbulence, the bond dominates the equity market. This study is the first of its kind to validate the adaptive market hypothesis using the novel transfer entropy framework in the bond and equity market.

Automated summary

This study applies effective transfer entropy (ETE) and Renyi transfer entropy (RTE) to measure the information flow between government bonds and equity market of G7 countries. The results show that the magnitude and direction of information flow between the two markets are dynamic over time and market conditions, indicating their adaptiveness to cross-market information flow changes. Although information flow from equity market dominates, it is also dynamic over time and market state. However, during market turbulence, government bonds dominate the equity market. This study is the first to validate the adaptive market hypothesis using the novel transfer entropy framework in bond and equity markets.