Information measure for financial time series: Quantifying short-term market heterogeneity

Linda Ponta and Anna Carbone

Physica A: Statistical Mechanics and its Applications, 2018, vol. 510, issue C, 132-144

Abstract: A well-interpretable measure of information has been recently proposed based on a partition obtained by intersecting a random sequence with its moving average. The partition yields disjoint sets of the sequence, which are then ranked according to their size to form a probability distribution function and finally fed in the expression of the Shannon entropy. In this work, such entropy measure is implemented on the time series of prices and volatilities of six financial markets. The analysis has been performed, on tick-by-tick data sampled every minute for six years of data from 1999 to 2004, for a broad range of moving average windows and volatility horizons. The study shows that the entropy of the volatility series depends on the individual market, while the entropy of the price series is practically invariant for the six markets. Finally, a cumulative information measure – the Market Heterogeneity Index – derived from the integral of the entropy measure, is introduced for obtaining the weights of an Efficient Portfolio. A comparison with the weights obtained by using the Sharpe ratio – a traditional risk diversity measure – is also reported.

Keywords: Entropy; Long-range correlated time series; Market heterogeneity; Portfolio selection (search for similar items in EconPapers)
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0378437118308100
Full text for ScienceDirect subscribers only. Journal offers the option of making the article available online on Science direct for a fee of $3,000

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:phsmap:v:510:y:2018:i:c:p:132-144

DOI: 10.1016/j.physa.2018.06.085

Access Statistics for this article

Physica A: Statistical Mechanics and its Applications is currently edited by K. A. Dawson, J. O. Indekeu, H.E. Stanley and C. Tsallis

More articles in Physica A: Statistical Mechanics and its Applications from Elsevier
Bibliographic data for series maintained by Catherine Liu ().