Financial Entropy: The Degree of Disorder, Randomness and Unpredictability

Authors : Turgay Geçer

Pages : 140-165

View : 36 | Download : 44

Publication Date : 2024-06-30

Article Type : Review Paper

Abstract :The notion of financial entropy refers to the degree of unpredictability, disorder, and risk in financial markets under the influence of various internal and external factors. Financial entropy possesses numerous consequences, including an elevated level of volatility, uncertainty, risk, complexity, contagion risk, and market inefficiency. Understanding the concept of financial entropy holds significant importance for financial analysts and traders as it provides valuable insights into the potential returns and risks associated with investments. The effective management of financial entropy necessitates meticulous attention to market conditions and a comprehensive comprehension of the motives and risks associated with financial markets. Numerous theories and techniques have been developed to quantify financial entropy, including random walk theory, noise, entropy index, entropy-based risk measure, Shannon entropy, Tsallis entropy, and Rényi entropy. The study explores the notion of the ‘quantum analogy of financial entropy’ and proposes a comparison between quantum mechanics and financial entropy to gain insight into the general behavior of market participants and clarify the uncertainty and unpredictability of financial markets. These principles emphasize the significance of regularly monitoring financial market conditions and adjusting strategies accordingly to effectively manage financial entropy.
Keywords : Entropi, Ekonofizik, Finansal Entropi