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Information Theory and Market Behavior

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  • Jing Chen

    (University of Northern British Columbia)

Abstract

Some recent empirical works indicate that investor performance and market patterns are primarily information driven instead of a behavioral phenomenon. However, Grossman and Stiglitz information theory and its variations offer little guidance in identifying informed investors and in distinguishing between securities with scarce information and those with widely available information. We show that most empirical evidences about market behaviors documented in the literature can be explained by a new information theory generalized from Shannon’s entropy theory of information. Investor performance and market patterns are the results of information processing by investors of different sizes with different background knowledge.

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File URL: http://128.118.178.162/eps/fin/papers/0503/0503009.pdf
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Bibliographic Info

Paper provided by EconWPA in its series Finance with number 0503009.

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Length: 26 pages
Date of creation: 10 Mar 2005
Date of revision:
Handle: RePEc:wpa:wuwpfi:0503009

Note: Type of Document - pdf; pages: 26
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Web page: http://128.118.178.162

Related research

Keywords: information; entropy; market patterns; behavioral finance;

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Cited by:
  1. Olivier Brandouy & Jean-Paul Delahaye & Lin Ma & Hector Zenil, 2012. "Algorithmic Complexity of Financial Motions," ASSRU Discussion Papers, ASSRU - Algorithmic Social Science Research Unit 1204, ASSRU - Algorithmic Social Science Research Unit.
  2. Brandouy, Olivier & Delahaye, Jean-Paul & Ma, Lin & Zenil, Hector, 2014. "Algorithmic complexity of financial motions," Research in International Business and Finance, Elsevier, Elsevier, vol. 30(C), pages 336-347.

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