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Quantifying the Multiscale Predictability of Financial Time Series by an Information-Theoretic Approach

1
School of Economics and Management, Beijing Jiaotong University, Beijing 100044, China
2
School of Science, Beijing Jiaotong University, Beijing 100044, China
*
Author to whom correspondence should be addressed.
Entropy 2019, 21(7), 684; https://doi.org/10.3390/e21070684
Received: 10 June 2019 / Revised: 4 July 2019 / Accepted: 8 July 2019 / Published: 12 July 2019
(This article belongs to the Special Issue Multiscale Entropy Approaches and Their Applications)
PDF [625 KB, uploaded 12 July 2019]

Abstract

Making predictions on the dynamics of time series of a system is a very interesting topic. A fundamental prerequisite of this work is to evaluate the predictability of the system over a wide range of time. In this paper, we propose an information-theoretic tool, multiscale entropy difference (MED), to evaluate the predictability of nonlinear financial time series on multiple time scales. We discuss the predictability of the isolated system and open systems, respectively. Evidence from the analysis of the logistic map, Hénon map, and the Lorenz system manifests that the MED method is accurate, robust, and has a wide range of applications. We apply the new method to five-minute high-frequency data and the daily data of Chinese stock markets. Results show that the logarithmic change of stock price (logarithmic return) has a lower possibility of being predicted than the volatility. The logarithmic change of trading volume contributes significantly to the prediction of the logarithmic change of stock price on multiple time scales. The daily data are found to have a larger possibility of being predicted than the five-minute high-frequency data. This indicates that the arbitrage opportunity exists in the Chinese stock markets, which thus cannot be approximated by the effective market hypothesis (EMH).
Keywords: predictability; multiscale analysis; entropy rate; memory effect; financial time series predictability; multiscale analysis; entropy rate; memory effect; financial time series
This is an open access article distributed under the Creative Commons Attribution License which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited (CC BY 4.0).
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Zhao, X.; Liang, C.; Zhang, N.; Shang, P. Quantifying the Multiscale Predictability of Financial Time Series by an Information-Theoretic Approach. Entropy 2019, 21, 684.

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