Forbidden patterns, permutation entropy and stock market inefficiency

LUCIANO ZUNINO; MASSIMILIANO ZANIN; BENJAMIN M. TABAK; DARÍO G. PÉREZ; OSVALDO A. ROSSO

PHYSICA A - STATISTICAL AND THEORETICAL PHYSICS

ELSEVIER SCIENCE BV

Lugar: Amsterdam, The Netherlands; Año: 2009 vol. 388 p. 2854 - 2864

0378-4371

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.