Abstract
In this study, we evaluate the relationship between efficiency and probability of the crash, thus the evolution of the daily informational efficiency is measured for the indie stock market index. The efficiency, which is the issue addressed by the weak-form efficient market hypothesis, is calculated using a new method the Shannon entropy and the symbolic time series analysis. A logit model is applied in order to study the relationship between efficiency and probability of the financial crash.
Highlights
The theory of efficiency is considered as one of the most controversial theories in the financial markets theory
In this study, we evaluate the relationship between efficiency and probability of the crash, the evolution of the daily informational efficiency is measured for the indie stock market index
A logit model is applied to study the relationship between efficiency and the probability of financial crash, the logit model suggests that a decrease in efficiency increases the probability of a crisis on the financial market
Summary
The theory of efficiency is considered as one of the most controversial theories in the financial markets theory. Despite the abundance of empirical work to test the hypothesis of efficiency, no clear conclusions seemed This lack of consensus results is probably related to the importance of efficiency in financial theory. Considering the possibility of finding the deterministic chaos in financial markets, or at least the fractal Brownian motion some authors have proposed the Hurst exponent as a measure of efficiency, Peters [1994.1996]. Grech and Mazur [2004],Taback and cujeiro(2004,2005, 2008, 2009) have employed the Hurst exponent to measure changes in efficiency over time Some authors, such as Bassler et al [2006] and Mc Cauley and others [2007] criticize this measure and argue that a Hurst exponent different from 1⁄2 We summarize the finding of this paper in the last Section
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