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Studying the impact of fluctuations, spikes and rare events in time series through a wavelet entropy predictability measure

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  • Mastroeni, Loretta
  • Mazzoccoli, Alessandro
  • Vellucci, Pierluigi

Abstract

Data has become one of the most crucial sources of human life. In particular, the ability to predict the future through data is a widely studied topic. In finance, as an instance, increased volatility, fluctuations, low-frequency events, and rare events negatively affect the predictability of data, thus increasing the level of risk. As a consequence, the inability to make accurate predictions on future events increases the uncertainty and variability of a given scenario, indicating a consequent increase in risk. In this paper, we analyze data predictability introducing a new measure based on entropy and the wavelet transform. In particular, we show that the data are less predictable than one might expect due to the mentioned fluctuations and low-frequency events. Furthermore, we apply our tool to real data, in particular to time series of commodities. As a result, thanks to this new measure, we can observe that the price time series under analysis exhibit a significant level of unpredictability due to increased volatility, fluctuations, and the influence of low-frequency events.

Suggested Citation

  • Mastroeni, Loretta & Mazzoccoli, Alessandro & Vellucci, Pierluigi, 2024. "Studying the impact of fluctuations, spikes and rare events in time series through a wavelet entropy predictability measure," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 641(C).
    • Handle: RePEc:eee:phsmap:v:641:y:2024:i:c:s0378437124002292
    DOI: 10.1016/j.physa.2024.129720
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    1. Mastroeni, Loretta & Mazzoccoli, Alessandro, 2024. "Quantifying predictive knowledge: Wavelet energy α-divergence measure for time series uncertainty reduction," Chaos, Solitons & Fractals, Elsevier, vol. 188(C).
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    3. Mastroeni, Loretta & Mazzoccoli, Alessandro & Vellucci, Pierluigi, 2024. "Wavelet entropy and complexity–entropy curves approach for energy commodity price predictability amid the transition to alternative energy sources," Chaos, Solitons & Fractals, Elsevier, vol. 184(C).

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