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Tsallis entropy: Do the market size and liquidity matter?

Listed author(s):
  • Gurdgiev, Constantin
  • Harte, Gerard

One of the key assumptions in financial markets analysis is that of normally distributed returns and market efficiency. Both of these assumptions have been extensively challenged in the literature. In the present paper, we examine returns for a number of FTSE 100 and AIM stocks and indices based on maximising the Tsallis entropy. This framework allows us to show how the distributions evolve and scale over time. Classical theory dictates that if markets are efficient then the time variant parameter of the Tsallis distribution should scale with a power equal to 1, or normal diffusion. We find that for the majority of securities and indices examined, the Tsallis time variant parameter is scaled with super diffusion of greater than 1. We further evaluated the fractal dimensions and Hurst exponents and found that a fractal relationship exists between main equity indices and their components.

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File URL: http://www.sciencedirect.com/science/article/pii/S1544612316300186
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Article provided by Elsevier in its journal Finance Research Letters.

Volume (Year): 17 (2016)
Issue (Month): C ()
Pages: 151-157

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Handle: RePEc:eee:finlet:v:17:y:2016:i:c:p:151-157
DOI: 10.1016/j.frl.2016.03.006
Contact details of provider: Web page: http://www.elsevier.com/locate/frl

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  1. Onali, Enrico & Goddard, John, 2011. "Are European equity markets efficient? New evidence from fractal analysis," International Review of Financial Analysis, Elsevier, vol. 20(2), pages 59-67, April.
  2. Fredrick Michael & M. D. Johnson, 2001. "Financial Market Dynamics," Papers cond-mat/0108017, arXiv.org.
  3. Silvio M. Duarte Queiros & Constantino Tsallis, 2004. "Bridging the ARCH model for finance and nonextensive entropy," Papers cond-mat/0401181, arXiv.org, revised Jan 2004.
  4. Stavroyiannis, S. & Makris, I. & Nikolaidis, V., 2010. "Non-extensive properties, multifractality, and inefficiency degree of the Athens Stock Exchange General Index," International Review of Financial Analysis, Elsevier, vol. 19(1), pages 19-24, January.
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