Information measure for financial time series: quantifying short-term market heterogeneity

A well-interpretable measure of information has been recently proposed based on a partition obtained by intersecting a random sequence with its moving average. The partition yields disjoint sets of the sequence, which are then ranked according to their size to form a probability distribution function and finally fed in the expression of the Shannon entropy. In this work, such entropy measure is implemented on the time series of prices and volatilities of six financial markets. The analysis has been performed, on tick-by-tick data sampled every minute for six years of data from 1999 to 2004, for a broad range of moving average windows and volatility horizons. The study shows that the entropy of the volatility series depends on the individual market, while the entropy of the price series is practically a market-invariant for the six markets. Finally, a cumulative information measure - the `Market Heterogeneity Index'- is derived from the integral of the proposed entropy measure. The values of the Market Heterogeneity Index are discussed as possible tools for optimal portfolio construction and compared with those obtained by using the Sharpe ratio a traditional risk diversity measure

Consistent Quantification of Complex Dynamics via a Novel Statistical Complexity Measure

Natural systems often show complex dynamics. The quantification of such complex dynamics is an important step in, e.g., characterization and classification of different systems or to investigate the effect of an external perturbation on the dynamics. Promising routes were followed in the past using concepts based on (Shannon’s) entropy. Here, we propose a new, conceptually sound measure that can be pragmatically computed, in contrast to pure theoretical concepts based on, e.g., Kolmogorov complexity. We illustrate the applicability using a toy example with a control parameter and go on to the molecular evolution of the HIV1 protease for which drug treatment can be regarded as an external perturbation that changes the complexity of its molecular evolutionary dynamics. In fact, our method identifies exactly those residues which are known to bind the drug molecules by their noticeable signal. We furthermore apply our method in a completely different domain, namely foreign exchange rates, and find convincing results as well