Phase-transition–like behaviour of information measures in financial markets

Centre for Research in Complex Systems, Charles Sturt University - Bathurst, Australia and Centre for the Mind, University of Sydney - Sydney, Australia

Corresponding author: mike@centreforthemind.com

Received: 1 February 2009
Accepted: 29 June 2009

Abstract

We apply measures based on information theory to the analysis of day close equity prices traded on US stock markets over the 13-year interval from 1995 up until after the market crash of September 2008. We show that the mutual information between prices provides insight into the changing relationships between equities over a time period which includes three known market crashes and two events which have not previously been included in this type of study, one of which is related to the sub-prime meltdown starting in 2007. Specifically, the mutual information around market crashes shows behaviour typical of the phase transitions studied in condensed-matter physics, however similar but more extended peaks in mutual information are also observed at other times not associated with any known market crashes.