Exploring stock markets dynamics: a two-dimensional entropy approach in return/volume space

Tomasz Kopczewski () and Łukasz Bil
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Tomasz Kopczewski: Uniwersytet Warszawski, Wydział Nauk Ekonomicznych

Bank i Kredyt, 2024, vol. 55, issue 6, 731-758

Abstract: This paper presents an entropy-based analysis of returns and trading volumes in stock markets. We introduce a measure of entropy in the return/volume space, leveraging Shannon’s entropy, Theil’s index, Relative Entropy, Tsallis distribution, and the Kullback-Leibler Divergence. We assess one- and two-dimensional returns and volume distributions, separately and jointly. This exploratory study aims to discover and understand patterns and relationships in data that are not yet well-defined in the literature. By exploring entropy measures, we identify mutual relations between returns and volume in financial data during global shocks such as the COVID-19 pandemic and the war in Ukraine. Revealing entropy changes in the return/volume space consistent with changes in the real economy allows for the inclusion of a new variable in machine learning algorithms that reflects the system’s unpredictability.

Keywords: financial markets; return and trading volume; entropy; Kullback-Leibler Divergence; Tsallis distribution (search for similar items in EconPapers)
JEL-codes: C49 C58 G12 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:nbp:nbpbik:v:55:y:2024:i:6:p:731-758

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