The Relationship between the US Economy's Information Processing and Absorption Ratios: Systematic vs Systemic Risk

Area of Science:

• Economics
• Information Theory
• Financial Markets

Background:

• The 2008 financial collapse highlighted the need for robust systemic risk measures.
• The absorption ratio, a popular metric, quantifies market coupling and systemic risk.
• High market coupling increases susceptibility to systemic collapse.

Purpose of the Study:

• Introduce and explore an alternative measure of financial market health: the implied information processing ratio (entropic efficiency).
• Investigate the relationship between the absorption ratio and the new entropic efficiency measure.
• Examine the utility of these ratios in predicting economic downturns and measuring systematic risk.

Main Methods:

• Derived the implied information processing ratio using information theory concepts.
• Analyzed the relationship between the absorption ratio and the entropic efficiency measure.
• Explored the connection between these ratios and different types of economic risks.

Main Results:

• The entropic efficiency measure shows potential for predicting economic downturns.
• Both absorption ratio and entropic efficiency provide insights into financial market coupling and systemic risk.
• The study establishes a relationship between these two distinct risk assessment metrics.

Conclusions:

• The implied information processing ratio offers a novel perspective on financial market health.
• Joint utilization of absorption ratio and entropic efficiency can enhance systemic and systematic risk management.
• This research provides a foundation for developing optimal strategies to mitigate economic risks.