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Entropy
Volume 22
Issue 9
10.3390/e22091064
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Article

The Flow of Information in Trading: An Entropy Approach to Market Regimes

by
Anqi Liu
1,*,
Jing Chen
1,
Steve Y. Yang
2 and
Alan G. Hawkes
3
1
School of Mathematics, Cardiff University, Cardiff CF24 4AG, UK
2
School of Business, Stevens Institute of Technology, Hoboken, NJ 03070, USA
3
School of Management, Swansea University, Swansea SA1 8EN, UK
*
Author to whom correspondence should be addressed.
Entropy 2020, 22(9), 1064; https://doi.org/10.3390/e22091064
Submission received: 29 August 2020 / Revised: 19 September 2020 / Accepted: 21 September 2020 / Published: 22 September 2020
(This article belongs to the Special Issue Information Theory and Economic Network)
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Abstract

In this study, we use entropy-based measures to identify different types of trading behaviors. We detect the return-driven trading using the conditional block entropy that dynamically reflects the “self-causality” of market return flows. Then we use the transfer entropy to identify the news-driven trading activity that is revealed by the information flows from news sentiment to market returns. We argue that when certain trading behavior becomes dominant or jointly dominant, the market will form a specific regime, namely return-, news- or mixed regime. Based on 11 years of news and market data, we find that the evolution of financial market regimes in terms of adaptive trading activities over the 2008 liquidity and euro-zone debt crises can be explicitly explained by the information flows. The proposed method can be expanded to make “causal” inferences on other types of economic phenomena.
Keywords: information entropy; market information flows; trading behavior identification; news sentiment information entropy; market information flows; trading behavior identification; news sentiment

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MDPI and ACS Style

Liu, A.; Chen, J.; Yang, S.Y.; Hawkes, A.G. The Flow of Information in Trading: An Entropy Approach to Market Regimes. Entropy 2020, 22, 1064. https://doi.org/10.3390/e22091064

AMA Style

Liu A, Chen J, Yang SY, Hawkes AG. The Flow of Information in Trading: An Entropy Approach to Market Regimes. Entropy. 2020; 22(9):1064. https://doi.org/10.3390/e22091064

Chicago/Turabian Style

Liu, Anqi, Jing Chen, Steve Y. Yang, and Alan G. Hawkes. 2020. "The Flow of Information in Trading: An Entropy Approach to Market Regimes" Entropy 22, no. 9: 1064. https://doi.org/10.3390/e22091064

APA Style

Liu, A., Chen, J., Yang, S. Y., & Hawkes, A. G. (2020). The Flow of Information in Trading: An Entropy Approach to Market Regimes. Entropy, 22(9), 1064. https://doi.org/10.3390/e22091064

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