MEASURING THE INFORMATIONAL EFFICIENCY OF STOCK MARKET BY SHANNON ENTROPY: AN EMPIRICAL STUDY OF ASEAN-6

Abstract

This paper uses Shannon entropy to measure and rank the informational efficiency of stock markets of six ASEAN countries. The paper uses daily closing prices to calculate the daily return between January 2001 and December 2016 thereby symbolizing the time series of market returns and use this symbolized time series to obtain Shannon entropy. The results show that none of these countries satisfies the efficient market hypothesis. Vietnam take the last position, i.e the lowest efficiency of the six countries, which occurs in all sample data and in the pre and post crisis period. Malaysia and Indonesia are the countries with the highest levels of market efficiency. The information efficiency during the crisis period is almost lower than in non-crisis periods except for Vietnam. While choosing the market for investment, investors should pay attention to the market efficiency in order to have appropriate investment projection. Inefficient markets will always exist opportunities for investors to actively build strategies and choose the right time to make a profit.

Keywords: Efficient market hypothesis, information theory, Shannon entropy, level of market efficiency, symbolized time series.