Simple New Method to Predict Bear Markets (The Entropic Linkage between Equity and Bond Market Dynamics)

The Entropic Linkage between Equity and Bond Market Dynamics. Entropy. 2017; 19(6):292.

13 Pages Posted: 20 Mar 2017 Last revised: 30 Jul 2017

See all articles by Edgar Parker

Edgar Parker

New York Life Insurance Company

Date Written: March 15, 2017

Abstract

An alternative derivation of the yield curve based on entropy or the loss of information as it is communicated through time is introduced. Given this focus on entropy growth in communication the Shannon entropy will be utilized. Additionally, Shannon entropy’s close relationship to the Kullback–Leibler divergence is used to provide a more precise understanding of this new yield curve. The derivation of the entropic yield curve is completed with the use of the Burnashev reliability function which serves as a weighting between the true and error distributions. The deep connections between the entropic yield curve and the popular Nelson–Siegel specification are also examined. Finally, this entropically derived yield curve is used to provide an estimate of the economy’s implied information processing ratio. This information theoretic ratio offers a new causal link between bond and equity markets, and is a valuable new tool for the modeling and prediction of stock market behavior.

Keywords: Shannon Entropy, Kullback-Leibler Divergence, Yield Curve; Volatility, Cauchy Distribution, Phase Transition; Equity Market; Flash Crash

JEL Classification: G1, G12, G14, G170, D84, E43

Suggested Citation

Parker, Edgar, Simple New Method to Predict Bear Markets (The Entropic Linkage between Equity and Bond Market Dynamics) (March 15, 2017). The Entropic Linkage between Equity and Bond Market Dynamics. Entropy. 2017; 19(6):292.. Available at SSRN: https://ssrn.com/abstract=2933866 or http://dx.doi.org/10.2139/ssrn.2933866

Edgar Parker (Contact Author)

New York Life Insurance Company ( email )

51 Madison Avenue
New York, NY 10010
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
301
Abstract Views
934
rank
100,458
PlumX Metrics