Entropic Market Timing

We propose an information theoretic approach to measure price efficiency of financial assets and aggregate markets. Our measures draw on the idea of return predictability and are directly linked to the weak-form efficiency of the Efficient Market Hypothesis. Asness et. al. (2013) document strong persistence of value and momentum anomalies in various financial markets and across different asset classes. Our efficiency measures are able to time both value and momentum in equity returns by identifying inefficiencies in the subsets of assets that are driving value and momentum. The primary duty of the measures is to signal periods where active asset allocation into value or momentum based strategies can be profitable and when passive investment is preferable. We therefore provide timing measures for two of the most important and most established financial market phenomena. We also document that market efficiency is cyclical for the U.S. stock market and varies over time