Market efficiency: an information entropy perspective

Imen Mahmoud and Kamel Naoui

International Journal of Management and Enterprise Development, 2018, vol. 17, issue 2, 95-120

Abstract: The aim of this paper is to examine the market efficiency from an information entropy perspective. Specifically, we compare some emerging and developed markets to pinpoint efficiency of these markets in time. We also used the symbolic time series analysis to detect dynamics of the processes under investigation over the period 2003-2013. The results indicate that these markets show a dynamic market efficiency unlike what static tests seem to suggest. Moreover, emerging and developed markets are less efficient. This lower efficiency comes in parallel with crisis periods (financial or political). When the market is efficient, market returns move following a random position and information entropy reaches its maximum. However, when an event is particular, entropy decreases and the market is considered inefficient. When the market is inefficient, prices do not instantly reflect new information, which replicates an information comprehension process, through a learning process that is considered time-consuming.

Keywords: crisis; information approach; knowledge; learning; market efficiency; Shannon entropy. (search for similar items in EconPapers)
Date: 2018
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Persistent link: https://EconPapers.repec.org/RePEc:ids:ijmede:v:17:y:2018:i:2:p:95-120

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