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Exploring stock markets dynamics: a two-dimensional entropy approach in return/volume space

Author

Listed:
  • Tomasz Kopczewski

    (Uniwersytet Warszawski, Wydział Nauk Ekonomicznych)

  • Łukasz Bil

Abstract

This paper presents an entropy-based analysis of returns and trading volumes in stock markets. We introduce a measure of entropy in the return/volume space, leveraging Shannon’s entropy, Theil’s index, Relative Entropy, Tsallis distribution, and the Kullback-Leibler Divergence. We assess one- and two-dimensional returns and volume distributions, separately and jointly. This exploratory study aims to discover and understand patterns and relationships in data that are not yet well-defined in the literature. By exploring entropy measures, we identify mutual relations between returns and volume in financial data during global shocks such as the COVID-19 pandemic and the war in Ukraine. Revealing entropy changes in the return/volume space consistent with changes in the real economy allows for the inclusion of a new variable in machine learning algorithms that reflects the system’s unpredictability.

Suggested Citation

  • Tomasz Kopczewski & Łukasz Bil, 2024. "Exploring stock markets dynamics: a two-dimensional entropy approach in return/volume space," Bank i Kredyt, Narodowy Bank Polski, vol. 55(6), pages 731-758.
    • Handle: RePEc:nbp:nbpbik:v:55:y:2024:i:6:p:731-758
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    More about this item

    Keywords

    financial markets; return and trading volume; entropy; Kullback-Leibler Divergence; Tsallis distribution;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • C49 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Other

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