Stock market pattern recognition using symbol entropy analysis

Jaime F. Lavín, Mauricio A. Valle and Nicolás S. Magner

The North American Journal of Economics and Finance, 2024, vol. 73, issue C

Abstract: Market uncertainty and asset pricing are closely related. The emergence of global and local shocks provokes price patterns in stock markets that threaten overall market stability. Using a combination of symbol entropy analysis, regression models, and forecast variance decomposition estimates, we examine the relationships between the frequency of states associated with rising and falling price patterns of the S&P 500 index, its implied volatility, and the fluctuations in the global stock market uncertainty. We find a positive (negative) relationship between the increase (decrease) in global uncertainty and the frequency of extreme bear (bull) episodes. Similarly, we observe the same relationship between increases (decreases) in the implied volatility and the frequency of extreme bear (bull) episodes. Furthermore, joint increases (decreases) in implied volatility and global uncertainty are positively (negatively) associated with the frequency of bear (bull) episodes in the S&P 500 index. Finally, interconnectedness studies confirm the relevance of the mutual influence of the phenomenon and its dynamic nature, which increases the probability of observing shock waves of financial instability in global and local stock markets. Our work highlights the need to consider price patterns and their links to uncertainty as factors of stock market instability. For policymakers, governments, and practitioners, our findings are a call to include events with high global/local impact in the radar of threats to financial stability.

Keywords: Symbol entropy; Stock market; Uncertainty; Implied volatility; Interconnectedness (search for similar items in EconPapers)
JEL-codes: G01 G14 G15 (search for similar items in EconPapers)
Date: 2024
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S106294082400086X
Full text for ScienceDirect subscribers only

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:ecofin:v:73:y:2024:i:c:s106294082400086x

DOI: 10.1016/j.najef.2024.102161

Access Statistics for this article

The North American Journal of Economics and Finance is currently edited by Hamid Beladi

More articles in The North American Journal of Economics and Finance from Elsevier
Bibliographic data for series maintained by Catherine Liu ().