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On entropy, financial markets and minority games

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  • Zapart, Christopher A.

Abstract

The paper builds upon an earlier statistical analysis of financial time series with Shannon information entropy, published in [L. Molgedey, W. Ebeling, Local order, entropy and predictability of financial time series, European Physical Journal B—Condensed Matter and Complex Systems 15/4 (2000) 733–737]. A novel generic procedure is proposed for making multistep-ahead predictions of time series by building a statistical model of entropy. The approach is first demonstrated on the chaotic Mackey–Glass time series and later applied to Japanese Yen/US dollar intraday currency data. The paper also reinterprets Minority Games [E. Moro, The minority game: An introductory guide, Advances in Condensed Matter and Statistical Physics (2004)] within the context of physical entropy, and uses models derived from minority game theory as a tool for measuring the entropy of a model in response to time series. This entropy conditional upon a model is subsequently used in place of information-theoretic entropy in the proposed multistep prediction algorithm.

Suggested Citation

  • Zapart, Christopher A., 2009. "On entropy, financial markets and minority games," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 388(7), pages 1157-1172.
  • Handle: RePEc:eee:phsmap:v:388:y:2009:i:7:p:1157-1172
    DOI: 10.1016/j.physa.2008.11.047
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    References listed on IDEAS

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    1. Molgedey, Lutz & Ebeling, Werner, 2000. "Intraday patterns and local predictability of high-frequency financial time series," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 287(3), pages 420-428.
    2. Challet, Damien & Marsili, Matteo & Zhang, Yi-Cheng, 2001. "Stylized facts of financial markets and market crashes in Minority Games," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 294(3), pages 514-524.
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    6. Paul Jefferies & Michael Hart & Neil Johnson & P.M. Hui, 2001. "From market games to real-world markets," OFRC Working Papers Series 2001mf02, Oxford Financial Research Centre.
    7. Emanuel Derman, 2002. "The Perception of Time, Risk and Return During Periods of Speculation," Papers cond-mat/0201345, arXiv.org.
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    9. Burgos, E. & Ceva, Horacio & Perazzo, R.P.J., 2005. "Order and disorder in the local evolutionary minority game," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 354(C), pages 518-538.
    10. Darbellay, Georges A & Wuertz, Diethelm, 2000. "The entropy as a tool for analysing statistical dependences in financial time series," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 287(3), pages 429-439.
    11. David Lamper & Sam Howison & Neil Johnson, 2001. "Predictability of large future changes in a competitive evolving population," OFRC Working Papers Series 2001mf01, Oxford Financial Research Centre.
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    Cited by:

    1. Namaki, A. & Koohi Lai, Z. & Jafari, G.R. & Raei, R. & Tehrani, R., 2013. "Comparing emerging and mature markets during times of crises: A non-extensive statistical approach," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 392(14), pages 3039-3044.

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