Information-theoretic measures and modeling stock market volatility: a comparative approach

Author Affiliation

Muhammad Sheraz is Assistant Professor of Mathematical Sciences and Economics & Finance at Institute of Business Administration (IBA), Karach

Faculty / School

School of Mathematics and Computer Science (SMCS)

Department

Department of Mathematical Sciences

Was this content written or created while at IBA?

Yes

Document Type

Article

Source Publication

Risks

ISSN

2227-9091

Disciplines

Accounting | Business | Business Administration, Management, and Operations | Econometrics | Economics | Finance

Abstract

The volatility analysis of stock returns data is paramount in financial studies. We investigate the dynamics of volatility and randomness of the Pakistan Stock Exchange (PSX-100) and obtain insights into the behavior of investors during and before the coronavirus disease (COVID-19 pandemic). The paper aims to present the volatility estimations and quantification of the randomness of PSX-100. The methodology includes two approaches: (i) the implementation of EGARCH, GJR-GARCH, and TGARCH models to estimate the volatilities; and (ii) analysis of randomness in volatilities series, return series, and PSX-100 closing prices for pre-pandemic and pandemic period by using Shannon’s, Tsallis, approximate and sample entropies. Volatility modeling suggests the existence of the leverage effect in both the underlying periods of study. The results obtained using GARCH modeling reveal that the stock market volatility has increased during the pandemic period. However, information-theoretic results based on Shannon and Tsallis entropies do not suggest notable variation in the estimated volatilities series and closing prices. We have examined regularity and randomness based on the approximate entropy and sample entropy. We have noticed both entropies are extremely sensitive to choices of the parameters.

Indexing Information

HJRS - X Category, Scopus, Web of Science - Emerging Sources Citation Index (ESCI)

Publication Status

Published

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