On entropy, financial markets and minority games

Christopher A. Zapart

Physica A: Statistical Mechanics and its Applications, 2009, vol. 388, issue 7, 1157-1172

Abstract: The paper builds upon an earlier statistical analysis of financial time series with Shannon information entropy, published in [L. Molgedey, W. Ebeling, Local order, entropy and predictability of financial time series, European Physical Journal B—Condensed Matter and Complex Systems 15/4 (2000) 733–737]. A novel generic procedure is proposed for making multistep-ahead predictions of time series by building a statistical model of entropy. The approach is first demonstrated on the chaotic Mackey–Glass time series and later applied to Japanese Yen/US dollar intraday currency data. The paper also reinterprets Minority Games [E. Moro, The minority game: An introductory guide, Advances in Condensed Matter and Statistical Physics (2004)] within the context of physical entropy, and uses models derived from minority game theory as a tool for measuring the entropy of a model in response to time series. This entropy conditional upon a model is subsequently used in place of information-theoretic entropy in the proposed multistep prediction algorithm.

Keywords: Entropy; Econophysics; Minority games; High-frequency financial time series; Time series prediction; Foreign exchange currency markets (search for similar items in EconPapers)
Date: 2009
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Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:phsmap:v:388:y:2009:i:7:p:1157-1172

DOI: 10.1016/j.physa.2008.11.047

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