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Forbidden patterns, permutation entropy and stock market inefficiency |
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| Authors: | Luciano Zunino Massimiliano Zanin Darío G Pérez |
| Institution: | a Centro de Investigaciones Ópticas, (CONICET La Plata - CIC), C.C. No. 3, 1897 Gonnet, La Plata, Argentina b Departamento de Ciencias Básicas, Facultad de Ingeniería, Universidad Nacional de La Plata (UNLP), 1900 La Plata, Argentina c Departamento de Física, Facultad de Ciencias Exactas, Universidad Nacional de La Plata, 1900 La Plata, Argentina d Universidad Autónoma de Madrid, 28049 Madrid, Spain e Banco Central do Brasil, SBS Quadra 3, Bloco B, 13 andar, DF 70074-900, Brazil f Universidade Catolica de Brasilia, Brasilia, DF, Brazil g Instituto de Física, Pontificia Universidad Católica de Valparaíso (PUCV). 23-40025 Valparaíso, Chile h Centre for Bioinformatics, Biomarker Discovery and Information-Based Medicine, Hunter Medical Research Institute, School of Electrical Engineering and Computer Science, The University of Newcastle, University Drive, Callaghan NSW 2308, Australia i Chaos & Biology Group, Instituto de Cálculo, Facultad de Ciencias Exactas y Naturales, Universidad de Buenos Aires, Pabellón II, Ciudad Universitaria. 1428 Ciudad de Buenos Aires, Argentina |
| Abstract: | In this paper we introduce two new quantifiers for the stock market inefficiency: the number of forbidden patterns and the normalized permutation entropy. They are model-independent measures, thus they have more general applicability. We find robust evidence that degree of market inefficiency is positively correlated with the number of forbidden patterns and negatively correlated with the permutation entropy. Our empirical results suggest that these two physical tools are useful to discriminate the stage of stock market development and can be easily implemented. |
| Keywords: | 89 65 Gh 05 45 Tp 89 75 Da 89 20 -a |
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