Stock Returns, Market Trends, and Information Theory: A Statistical Equilibrium Approach

Emanuele Citera ()

No 2116, Working Papers from New School for Social Research, Department of Economics

Abstract: This paper attempts to develop a theory of statistical equilibrium based on an entropy-constrained framework, that allow us to explain the distribution of stock returns over different market trends. By making use of the Quantal Response Statistical Equilibrium model (Scharfenaker and Foley, 2017), we recover the cross-sectional distribution of daily returns of individual company listed the S&P 500, over the period 1988-2019. We then make inference on the frequency distributions of returns by studying them over bull markets, bear markets and corrections. The results of the model shed light on the microscopic as well as macroscopic behavior of the stock market, in addition to provide insights in terms of stock returns distribution.

Keywords: Stock returns; statistical equilibrium; information theory; stock market; maximum entropy (search for similar items in EconPapers)
JEL-codes: C10 C70 D84 G10 G40 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2021-10
New Economics Papers: this item is included in nep-cwa, nep-fmk, nep-hme and nep-ore
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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http://www.economicpolicyresearch.org/econ/2021/NSSR_WP_162021.pdf First version, 2021 (application/pdf)

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Persistent link: https://EconPapers.repec.org/RePEc:new:wpaper:2116

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