The role of mutual information content of profit from market indices in the synchronicity of returns and portfolio performance with the mutual entropy approach

Subject Areas : Financial Engineering

Hassan Zarei ¹ ( Department of Financial Management, Arak Branch, Islamic Azad University, Arak, Iran. )
Majid Davodi Nasr ² ( Department of Financial Management, Arak Branch, Islamic Azad University, Arak, Iran. )
Majid Zanjirdar ³ ( Department of Financial Management, Arak Branch, Islamic Azad University, Arak, Iran. )

Received: 2022-12-22 Accepted : 2023-05-20 Published : 2023-11-23

Keywords: Portfolio performance, Market indices, Mutual entropy, Mutual information of profit, Synchronicity of return,

Abstract :

Objective: The purpose of this research was to examine the role of the mutual information content of earnings from market indices in the synchrony of returns and portfolio performance. Research Methodology: This study was applied, descriptive, and analytical. The statistical population consisted of all companies listed on the Tehran Stock Exchange during the years 2012 to 2021. After screening, 118 companies were selected as the statistical sample. Joint entropy was used to measure the mutual information content of the variables. The Rahavard Novin software and the website of the Securities and Exchange Organization were used for data collection. Student's t-tests, mean comparison, paired tests, Levene's test for equality of variances, and bootstrap in hypothesis testing were employed, along with the R software for analysis. Findings: The results indicated that while the mutual information of company earnings from market indices leads to greater synchrony in returns, it is not statistically significant. Additionally, the results showed that portfolios with a coefficient of mutual information from earnings perform differently than traditional portfolios. The findings of the study suggest that portfolios formed from the top 20% coefficient of mutual information, overall and in holding periods of 6, 9, and 12 months, performed better than traditional and other portfolios. Originality / Value: The contribution of this research includes the use of joint entropy as a tool to measure the mutual information content of earnings from the market and examining its effect on synchrony, as well as presenting a new model for portfolio formation.

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