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

Long Memory and Volatility Clustering: is the empirical evidence consistent across stock markets?

Long memory and volatility clustering are two stylized facts frequently related to financial markets. Traditionally, these phenomena have been studied based on conditionally heteroscedastic models like ARCH, GARCH, IGARCH and FIGARCH, inter alia. One advantage of these models is their ability to capture nonlinear dynamics. Another interesting manner to study the volatility phenomena is by using measures based on the concept of entropy. In this paper we investigate the long memory and volatility clustering for the SP 500, NASDAQ 100 and Stoxx 50 indexes in order to compare the US and European Markets. Additionally, we compare the results from conditionally heteroscedastic models with those from the entropy measures. In the latter, we examine Shannon entropy, Renyi entropy and Tsallis entropy. The results corroborate the previous evidence of nonlinear dynamics in the time series considered.Comment: 8 pages; 2 figures; paper presented in APFA 6 conferenc

Mutual information: a dependence measure for nonlinear time series

This paper investigates the possibility to analyse the structure of unconditional or conditional (and possibly nonlinear) dependence in financial returns without requiring the specification of mean-variance models or a theoretical probability distribution. The main goal of the paper is to show how mutual information can be used as a measure of dependence in financial time series. One major advantage of this approach resides precisely in its ability to account for nonlinear dependencies with no need to specify a theoretical probability distribution or use of a mean-variance model.Mutual information, nonlinear dependence, market efficiency

Entropy-Based Independence Test

This paper presents a new test of independence (linear and non-linear) among distributions based on the entropy of Shannon. The main advantages of the presented approach are the fact that this measure does not need to assume any type of theoretical probability distribution and has the ability to capture the linear and non-linear dependencies, without requiring the specification of any kind of dependence model

Linear and nonlinear models for the analysis of the relationship between stock market prices and macroeconomic and financial factors

The main objective of this paper is to assess how mutual information as a measure of global dependence between stock markets and macroeconomic factors can overcome some of the weaknesses of the traditional linear approaches commonly used in this context. One of the advantages of mutual information is that it does not require any prior assumption regarding the specification of a theoretical probability distribution or the specification of the dependence model. This study focuses on the Portuguese stock market where we evaluate the relevance of the macroeconomic and financial variables as determinants of the stock prices behaviour.nonlinear dependence, stock market, financial and macroeconomic factors

The fuzziness of Montado landscapes: progress in assessing user preferences through photo-based surveys

The European Landscape Convention (2000) states that landscape is an important contributor to the quality of life for people everywhere and that landscape is a complex of natural and cultural factors, as they are seen by the observer. Landscape preference, i.e. the degree to which people like a landscape and variations in the same type of landscape pattern, is an emerging field of knowledge, still under development. Moreover, knowing how preferences of rural landscapes differ among stakeholders can help define and support management responses to the changing demands of modern society. There is a need to understand this demand for new uses and activities, such as hunting, leisure, recreation, life quality support, and aesthetic appreciation. In Mediterranean extensive land use systems, such as the Montado, where agricultural production is under threat, but where the demand for amenity functions is increasing, assessing preferences and thus what the public is looking for, is particularly relevant. This papers demonstrates how photo based surveys can be an suitable tool for assessing landscape preferences in Montado landscapes, and also that, in order to cope with the underlying fuzziness of these landscapes, the images need to be edited (manipulated) so that the variations shown to respondents are adequately controlled in the study. The methodological approach as well as the results, of two different studies on the users preferences for Montado landscapes, applied to case-study areas in the region of Alentejo, Portugal, are presented. The issues concerned with photo manipulation are a particular focus of discussion

NONLINEAR DYNAMICS WITHIN MACROECONOMIC FACTORS AND STOCK MARKET IN PORTUGAL, 1993-2003

The main objective of this paper is to assess how mutual information as a measure of global dependence between stock markets and macroeconomic factors can overcome some of the weaknesses of the traditional linear approaches commonly used in this context. One of the advantages of mutual information is that it does not require any prior assumption regarding the specification of a theoretical probability distribution or the specification of the dependence model. This study focuses on the Portuguese stock market where we evaluate the relevance of the macroeconomic and financial variables as determinants of the stock prices behaviour. JEL Classification: C14, C22, C32 Keywords: Nonlinear dependence, mutual information, macroeconomic and financial factors

On the integrated behaviour of non-stationary volatility in stock markets

This paper analyses the behaviour of volatility for several international stock market indexes, namely the SP 500 (USA), the Nikkei (Japan), the PSI 20 (Portugal), the CAC 40 (France), the DAX 30 (Germany), the FTSE 100 (UK), the IBEX 35 (Spain) and the MIB 30 (Italy), in the context of non-stationarity. Our empirical results point to the evidence of the existence of integrated behaviour among several of those stock market indexes of different dimensions. It seems, therefore, that the behaviour of these markets tends to some uniformity, which can be interpreted as the existence of a similar behaviour facing to shocks that may affect the worldwide economy. Whether this is a cause or a consequence of market globalization is an issue that may be stressed in future work.Comment: 10 pages, 3 figures. Paper presented in the APFA 5 conferenc