Entropy of financial time series due to the shock of war

Paper: arXiv 2303.16155

Authors: Ewa A. Drzazga-Szczȩśniak, Piotr Szczepanik, Adam Z. Kaczmarek, Dominik Szczȩśniak

Abstract

The concept of entropy is not uniquely relevant to the statistical mechanics but among others it can play pivotal role in the analysis of a time series, particularly the stock market data. In this area sudden events are especially interesting as they describe abrupt data changes which may have long-lasting effects. Here, we investigate the impact of such events on the entropy of financial time series. As a case study we assume data of polish stock market in the context of its main cumulative index. This index is discussed for the finite time periods before and after outbreak of the 2022 Russian invasion of Ukraine, acting as the sudden event. The analysis allows us to validate the entropy-based methodology in assessing market changes as driven by the extreme external factors. We show that qualitative features of market changes can be captured quantitatively in terms of the entropy. In addition to that, the magnitude of the impact is analysed over various time periods in terms of the introduced entropic index. To this end, the present work also attempts to answer whether or not the recent war can be considered as a reason or at least catalyst to the current economic crisis.

Complexity vs Empirical Score

• Math Complexity: 5.5/10
• Empirical Rigor: 5.0/10
• Quadrant: Holy Grail — high math complexity, high empirical rigor

Why this score: The paper presents an interesting application of information theory (entropy) to financial time series during an exogenous shock (the 2022 Russian invasion of Ukraine). While mathematically sound and empirical in its focus on the Polish stock market, the scope is relatively narrow and localized to a single market index event study.

Research Flowchart

  flowchart TD
    A["Research Goal: Assess impact of 2022 Russian invasion of Ukraine on stock market entropy"] --> B["Data Inputs: Polish main cumulative stock index WIG before & after invasion"]
    B --> C["Methodology: Time series entropy calculation & Entropic Index introduction"]
    C --> D["Analysis: Compare finite time periods pre- and post-war shock"]
    D --> E["Findings: Qualitative market changes successfully quantified by entropy"]
    D --> F["Outcomes: Evaluated war as a catalyst for broader economic crisis"]