Entropy-Based Behavioural Efficiency of the Financial Market

Area of Science:

• Economics
• Financial Markets
• Behavioral Finance

Background:

• The dominant model of financial markets relies on the Efficient Market Hypothesis (EMH).
• EMH posits that market prices reflect all available information.
• This model has limitations in explaining real-world market behavior.

Purpose of the Study:

• To propose an alternative model: Behavioural Efficiency of the Financial Market (BEFM).
• To introduce behavioural entropy as a key metric, distinct from informational entropy.
• To challenge the concept of informational efficiency in financial markets.

Main Methods:

• Development of a new typology of information, including "implicit information" derived from observed behaviors.
• Linking behavioural entropy to behavioural efficiency using a non-linear logistic curve.
• Analysis of financial market dynamics through the lens of agent behavior.

Main Results:

• Financial markets exhibit behavioural efficiency rather than true informational efficiency.
• Behavioural entropy, measured by implicit information from observed behaviors, is a key determinant.
• A logistic curve models the relationship between behavioural entropy and efficiency.

Conclusions:

• Behavioural efficiency offers a more accurate framework for understanding financial markets.
• The concept of behavioural entropy provides a novel measure for market analysis.
• The study suggests a combined approach to overcome limitations of both EMH and Adaptive Market Hypothesis (AMH).