Abstract

GARCIA RUIZ, Reyna Susana; CRUZ AKE, Salvador  and  VENEGAS MARTINEZ, Francisco. An market efficiency measurement: An information theory approach. Contad. Adm [online]. 2014, vol.59, n.4, pp.137-166. ISSN 0186-1042.

In this paper, based on the concept of Shannon entropy, we propose a measure of market efficiency by using the empirical density function of returns. Under certain conditions of ergodicity and stationarity, it is shown that the sample entropy converges to the entropy of the dominant state. It is also shown that the proposed measure is consistent with some of the axioms from Artzner et al. (1999) of a coherent risk measure. Bounds on the behavior of entropy as a measure of efficiency on the basis of extreme cases are also established; going from deterministic processes to pure white noise stochastic processes. Finally, for illustrative purposes, we carry out several applications of the proposed eficiency measure of capital to different markets: DJIA, S & P500, FTSE100 and IPC.

Keywords : information; efficient markets; agents' behavior.