Forbidden patterns, permutation entropy and stock market inefficiency

Luciano Zunino, Massimiliano Zanin, Benjamin M. Tabak, DARIO GABRIEL PEREZ , Osvaldo A. Rosso

Research output: Contribution to journalArticlepeer-review

153 Scopus citations

Abstract

In this paper we introduce two new quantifiers for the stock market inefficiency: the number of forbidden patterns and the normalized permutation entropy. They are model-independent measures, thus they have more general applicability. We find robust evidence that degree of market inefficiency is positively correlated with the number of forbidden patterns and negatively correlated with the permutation entropy. Our empirical results suggest that these two physical tools are useful to discriminate the stage of stock market development and can be easily implemented.

Original languageEnglish
Pages (from-to)2854-2864
Number of pages11
JournalPhysica A: Statistical Mechanics and its Applications
Volume388
Issue number14
DOIs
StatePublished - 15 Jul 2009

Keywords

  • Forbidden patterns
  • Permutation entropy
  • Stock market inefficiency

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