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The Effects of Bankruptcy on the Structural Complexity of the Price Changes on WSE

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  • Paweł Fiedor
  • Artur Hołda

Abstract

In this study we present a method of analysing market efficiency using information theory. The efficiency of a given market is studied by the degree to which redundancy is present in the time series describing stock returns, while the particular tool used is called Shannon’s entropy rate, and can be interpreted as a measure of the predictability of stock returns (understood as the limits of prediction). We use this method to analyse time series describing logarithmic returns of chosen companies listed at Warsaw Stock Exchange, which have undergone bankruptcy. There exists a body of research analysing the efficiency of the whole market, but there are no detailed studies analysing how strongly negative economic situation of a company (and particularly information about this situation) affects the efficiency of price forma- tion processes with regards to the shares of this company, and how it affects the predictability of the changes in the prices of these shares. The review presented in this study, based on 44 stocks, is meant to be a prelude to many detailed studies of the influence of effects of events outside of the stock market on the structural complexity of the price formation processes themselves.

Suggested Citation

  • Paweł Fiedor & Artur Hołda, 2015. "The Effects of Bankruptcy on the Structural Complexity of the Price Changes on WSE," Ekonomia journal, Faculty of Economic Sciences, University of Warsaw, vol. 41.
    • Handle: RePEc:eko:ekoeko:41_59
    DOI: 10.17451/eko/41/2015/75
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    File URL: http://ekonomia.wne.uw.edu.pl/ekonomia/getFile/761
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    References listed on IDEAS

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    1. Márton Mestyán & Taha Yasseri & János Kertész, 2013. "Early Prediction of Movie Box Office Success Based on Wikipedia Activity Big Data," PLOS ONE, Public Library of Science, vol. 8(8), pages 1-8, August.
    2. Paweł Fiedor, 2014. "Information-theoretic approach to lead-lag effect on financial markets," The European Physical Journal B: Condensed Matter and Complex Systems, Springer;EDP Sciences, vol. 87(8), pages 1-9, August.
    3. Pawe{l} Fiedor, 2014. "Maximum Entropy Production Principle for Stock Returns," Papers 1408.3728, arXiv.org.
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