Entropy, the Information Processing Cycle, and the Forecasting of Bull and Bear Market Peaks and Troughs

Abstract

Many econophysics applications have modeled financial systems as if they were pure physical systems devoid of human limitations and errors. On the other hand, traditional financial theory has ignored limits that physics would impose on human interactions, communications, and computational abilities. The entropic yield curve as developed in (Parker 2017) blends the physical and human financial worlds in a new, powerful, and surprisingly simple way. This paper uses this information theoretic perspective to provide a new explanation of the dynamics and timing of financial cycles. Additionally, the entropic yield curve offers a new method of forecasting market peaks and troughs.

Keywords: Information Theory, Entropy, Shannon Entropy, Burnashev, Bull Market, Bear Market, Econophysics, Equity, Bond

JEL Classification: G12, G14, E32, E37, E43, E44, E49