Entropy 2018, 20(9), 662; https://doi.org/10.3390/e20090662
The Relationship between the US Economy’s Information Processing and Absorption Ratios: Systematic vs Systemic Risk†
New York Life Insurance Company, 51 Madison Avenue, New York, NY 10010, USA
†
Based on presentation at the 4th International Electronic Conference on Entropy and Its Applications, 21 November–1 December 2017. The views expressed in this article are the author’s own and do not reflect those of New York Life Insurance Company.
Received: 14 July 2018 / Revised: 30 August 2018 / Accepted: 31 August 2018 / Published: 2 September 2018
(This article belongs to the Special Issue Selected Papers from 4th International Electronic Conference on Entropy and Its Applications)
Abstract
After the 2008 financial collapse, the now popular measure of implied systemic risk called the absorption ratio was introduced. This statistic measures how closely the economy’s markets are coupled. The more closely financial markets are coupled the more susceptible they are to systemic collapse. A new alternative measure of financial market health, the implied information processing ratio or entropic efficiency of the economy, was derived using concepts from information theory. This new entropic measure can also be useful in predicting economic downturns and measuring systematic risk. In the current work, the relationship between these two ratios and types of risks are explored. Potential methods of the joint use of these different measures to optimally reduce systemic and systematic risk are introduced. View Full-TextKeywords:
systemic risk; systematic risk; portfolio management; absorption ratio; information processing ratio; Shannon entropy; entropic yield curve; regime shift; Markov switching models
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Supplementary material
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Externally hosted supplementary file 1
Link: http://www.entropicfinance.com
Description: Supplementary Materials can be found including the excel file with the macro and data used to estimate R/C at www.entropicfinance.com. The Treasury Yield Curve data is also freely available at: https://www.treasury.gov/resource-center/data-chart-center/Pages/index.aspx.
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Parker, E. The Relationship between the US Economy’s Information Processing and Absorption Ratios: Systematic vs Systemic Risk. Entropy 2018, 20, 662.
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