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Empirical implementation of entropy risk factor model: A test on Chilean peso

Author

Listed:
  • Efremidze, Levan
  • Stanley, Darrol J.
  • Park, Abraham
  • Wasilewski, Nikolai

Abstract

Currencies are used by many investors as a speculative or investment instrument. Their movements are complex and there are exchange rate models which suggest how to predict long and short-term fluctuations. In this paper we investigate the predictability of an exchange rate with an entropy risk factor model. Considering that recent studies find complex systems characteristics of financial markets, we explore the usefulness of sample entropy as a risk factor for currency fluctuations. The empirical testing of sample entropy is based on the data of the Chilean peso (CLP) exchange rate for the period of January 1, 2005 and November 25, 2016. We find evidence that Chilean peso market has enough market inefficiencies that can be profitably exploited by the sample entropy based prediction algorithm developed in this paper.

Suggested Citation

  • Efremidze, Levan & Stanley, Darrol J. & Park, Abraham & Wasilewski, Nikolai, 2019. "Empirical implementation of entropy risk factor model: A test on Chilean peso," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 532(C).
    • Handle: RePEc:eee:phsmap:v:532:y:2019:i:c:s0378437119310842
    DOI: 10.1016/j.physa.2019.121836
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    Citations

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    Cited by:

    1. Li, Chuchu & Lin, Qin & Huang, Dong & Grifoll, Manel & Yang, Dong & Feng, Hongxiang, 2023. "Is entropy an indicator of port traffic predictability? The evidence from Chinese ports," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 612(C).
    2. Efremidze, Levan & Stanley, Darrol J. & Kownatzki, Clemens, 2021. "Entropy trading strategies reveal inefficiencies in Japanese stock market," International Review of Economics & Finance, Elsevier, vol. 75(C), pages 464-477.

    More about this item

    Keywords

    Exchange rates; Currency trading; Market timing; Entropy; Chilean peso; USD/CLP;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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