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Multiscale Shannon entropy and its application in the stock market

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  • Gu, Rongbao

Abstract

In this paper, we perform a multiscale entropy analysis on the Dow Jones Industrial Average Index using the Shannon entropy. The stock index shows the characteristic of multi-scale entropy that caused by noise in the market. The entropy is demonstrated to have significant predictive ability for the stock index in both long-term and short-term, and empirical results verify that noise does exist in the market and can affect stock price. It has important implications on market participants such as noise traders.

Suggested Citation

  • Gu, Rongbao, 2017. "Multiscale Shannon entropy and its application in the stock market," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 484(C), pages 215-224.
    • Handle: RePEc:eee:phsmap:v:484:y:2017:i:c:p:215-224
    DOI: 10.1016/j.physa.2017.04.164
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