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Entropy 2017, 19(5), 226; doi:10.3390/e19050226

Information Entropy and Measures of Market Risk

1
Department of Statistics and Econometrics, Bucharest University of Economic Studies, Piata Romana 6, Bucharest 010371, Romania
2
ICMA Centre, Henley Business School, University of Reading, Whiteknights, Reading RG6 6BA, UK
*
Author to whom correspondence should be addressed.
Academic Editor: Kevin Knuth
Received: 29 March 2017 / Revised: 8 May 2017 / Accepted: 11 May 2017 / Published: 16 May 2017
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Abstract

In this paper we investigate the relationship between the information entropy of the distribution of intraday returns and intraday and daily measures of market risk. Using data on the EUR/JPY exchange rate, we find a negative relationship between entropy and intraday Value-at-Risk, and also between entropy and intraday Expected Shortfall. This relationship is then used to forecast daily Value-at-Risk, using the entropy of the distribution of intraday returns as a predictor. View Full-Text
Keywords: information entropy; entropy of a distribution function; value at risk; expected shortfall information entropy; entropy of a distribution function; value at risk; expected shortfall
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Pele, D.T.; Lazar, E.; Dufour, A. Information Entropy and Measures of Market Risk. Entropy 2017, 19, 226.

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