The Flow of Information in Trading: An Entropy Approach to Market Regimes
In this study, we use entropy-based measures to identify different types of trading behaviors. We detect the return-driven trading using the conditional block entropy that dynamically reflects the “self-causality” of market return flows. Then we use the transfer entropy to identify the news-driven t...
| Main Authors: | , , , |
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| Format: | Article |
| Language: | English |
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MDPI AG
2020-09-01
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| Series: | Entropy |
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| Online Access: | https://www.mdpi.com/1099-4300/22/9/1064 |
| _version_ | 1827705671621017600 |
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| author | Anqi Liu Jing Chen Steve Y. Yang Alan G. Hawkes |
| author_facet | Anqi Liu Jing Chen Steve Y. Yang Alan G. Hawkes |
| author_sort | Anqi Liu |
| collection | DOAJ |
| description | In this study, we use entropy-based measures to identify different types of trading behaviors. We detect the return-driven trading using the conditional block entropy that dynamically reflects the “self-causality” of market return flows. Then we use the transfer entropy to identify the news-driven trading activity that is revealed by the information flows from news sentiment to market returns. We argue that when certain trading behavior becomes dominant or jointly dominant, the market will form a specific regime, namely return-, news- or mixed regime. Based on 11 years of news and market data, we find that the evolution of financial market regimes in terms of adaptive trading activities over the 2008 liquidity and euro-zone debt crises can be explicitly explained by the information flows. The proposed method can be expanded to make “causal” inferences on other types of economic phenomena. |
| first_indexed | 2024-03-10T16:08:12Z |
| format | Article |
| id | doaj.art-e9a63cc706af454098403a5742174ffb |
| institution | Directory Open Access Journal |
| issn | 1099-4300 |
| language | English |
| last_indexed | 2024-03-10T16:08:12Z |
| publishDate | 2020-09-01 |
| publisher | MDPI AG |
| record_format | Article |
| series | Entropy |
| spelling | doaj.art-e9a63cc706af454098403a5742174ffb2023-11-20T14:43:16ZengMDPI AGEntropy1099-43002020-09-01229106410.3390/e22091064The Flow of Information in Trading: An Entropy Approach to Market RegimesAnqi Liu0Jing Chen1Steve Y. Yang2Alan G. Hawkes3School of Mathematics, Cardiff University, Cardiff CF24 4AG, UKSchool of Mathematics, Cardiff University, Cardiff CF24 4AG, UKSchool of Business, Stevens Institute of Technology, Hoboken, NJ 03070, USASchool of Management, Swansea University, Swansea SA1 8EN, UKIn this study, we use entropy-based measures to identify different types of trading behaviors. We detect the return-driven trading using the conditional block entropy that dynamically reflects the “self-causality” of market return flows. Then we use the transfer entropy to identify the news-driven trading activity that is revealed by the information flows from news sentiment to market returns. We argue that when certain trading behavior becomes dominant or jointly dominant, the market will form a specific regime, namely return-, news- or mixed regime. Based on 11 years of news and market data, we find that the evolution of financial market regimes in terms of adaptive trading activities over the 2008 liquidity and euro-zone debt crises can be explicitly explained by the information flows. The proposed method can be expanded to make “causal” inferences on other types of economic phenomena.https://www.mdpi.com/1099-4300/22/9/1064information entropymarket information flowstrading behavior identificationnews sentiment |
| spellingShingle | Anqi Liu Jing Chen Steve Y. Yang Alan G. Hawkes The Flow of Information in Trading: An Entropy Approach to Market Regimes Entropy information entropy market information flows trading behavior identification news sentiment |
| title | The Flow of Information in Trading: An Entropy Approach to Market Regimes |
| title_full | The Flow of Information in Trading: An Entropy Approach to Market Regimes |
| title_fullStr | The Flow of Information in Trading: An Entropy Approach to Market Regimes |
| title_full_unstemmed | The Flow of Information in Trading: An Entropy Approach to Market Regimes |
| title_short | The Flow of Information in Trading: An Entropy Approach to Market Regimes |
| title_sort | flow of information in trading an entropy approach to market regimes |
| topic | information entropy market information flows trading behavior identification news sentiment |
| url | https://www.mdpi.com/1099-4300/22/9/1064 |
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