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Financial time series analysis using the relation between MPE and MWPE

Author

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  • Chen, Shijian
  • Shang, Pengjian

Abstract

Multi-scale permutation entropy (MPE) and multi-scale weighted permutation entropy (MWPE) are two methods to describe the complexity of systems. Compared with the former one, MWPE considers the amplitude information of time series and is a modification of MPE, so it is generally thought that MWPE is better than MPE. In this paper, we discuss the relation between the two kinds of entropy by using different simulated data, and find MPE and MWPE has a good linear correlation in the sense of multi-scale. Later, the discovery is applied to stock markets, and we confirm that it also exists in financial time series, which means that in some cases MPE can replace MWPE to study the complexity of systems without sacrificing the accuracy of time series analysis. Meanwhile, the slope of fitting line between MPE and MWPE is proposed to test nonlinearity of time series as a new discriminant statistic.

Suggested Citation

  • Chen, Shijian & Shang, Pengjian, 2020. "Financial time series analysis using the relation between MPE and MWPE," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 537(C).
    • Handle: RePEc:eee:phsmap:v:537:y:2020:i:c:s0378437119315468
    DOI: 10.1016/j.physa.2019.122716
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    References listed on IDEAS

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    1. Wang, Yuanyuan & Shang, Pengjian, 2018. "A new measurement of financial time irreversibility based on information measures method," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 503(C), pages 221-230.
    2. Rong, Lei & Shang, Pengjian, 2018. "New irreversibility measure and complexity analysis based on singular value decomposition," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 512(C), pages 913-924.
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