An econophysics approach to analyse uncertainty in financial markets: an application to the Portuguese stock market

In recent years there has been a closer interrelationship between several scientific areas trying to obtain a more realistic and rich explanation of the natural and social phenomena. Among these it should be emphasized the increasing interrelationship between physics and financial theory. In this field the analysis of uncertainty, which is crucial in financial analysis, can be made using measures of physics statistics and information theory, namely the Shannon entropy. One advantage of this approach is that the entropy is a more general measure than the variance, since it accounts for higher order moments of a probability distribution function. An empirical application was made using data collected from the Portuguese Stock Market.Comment: 8 pages, 2 figures, presented in the conference Next Sigma-Phi 200

Finite-Sample Analysis of Fixed-k Nearest Neighbor Density Functional Estimators

We provide finite-sample analysis of a general framework for using k-nearest neighbor statistics to estimate functionals of a nonparametric continuous probability density, including entropies and divergences. Rather than plugging a consistent density estimate (which requires $k \to \infty$ as the sample size $n \to \infty$) into the functional of interest, the estimators we consider fix k and perform a bias correction. This is more efficient computationally, and, as we show in certain cases, statistically, leading to faster convergence rates. Our framework unifies several previous estimators, for most of which ours are the first finite sample guarantees.Comment: 16 pages, 0 figure

Sequence alignment, mutual information, and dissimilarity measures for constructing phylogenies

Existing sequence alignment algorithms use heuristic scoring schemes which cannot be used as objective distance metrics. Therefore one relies on measures like the p- or log-det distances, or makes explicit, and often simplistic, assumptions about sequence evolution. Information theory provides an alternative, in the form of mutual information (MI) which is, in principle, an objective and model independent similarity measure. MI can be estimated by concatenating and zipping sequences, yielding thereby the "normalized compression distance". So far this has produced promising results, but with uncontrolled errors. We describe a simple approach to get robust estimates of MI from global pairwise alignments. Using standard alignment algorithms, this gives for animal mitochondrial DNA estimates that are strikingly close to estimates obtained from the alignment free methods mentioned above. Our main result uses algorithmic (Kolmogorov) information theory, but we show that similar results can also be obtained from Shannon theory. Due to the fact that it is not additive, normalized compression distance is not an optimal metric for phylogenetics, but we propose a simple modification that overcomes the issue of additivity. We test several versions of our MI based distance measures on a large number of randomly chosen quartets and demonstrate that they all perform better than traditional measures like the Kimura or log-det (resp. paralinear) distances. Even a simplified version based on single letter Shannon entropies, which can be easily incorporated in existing software packages, gave superior results throughout the entire animal kingdom. But we see the main virtue of our approach in a more general way. For example, it can also help to judge the relative merits of different alignment algorithms, by estimating the significance of specific alignments.Comment: 19 pages + 16 pages of supplementary materia