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Crash occurrence probability and stock market efficiency: The Chinese stock exchange via Shannon entropy

Abstract The main purpose of this paper is to study the ability of the financial model to predict a crash, thus the evolution of the daily informational efficiency is measured for the Chinese stock market index. The efficiency, which is the issue addressed by the weak-form efficient market hypothesis, is calculated using a new method the Shannon entropy and the symbolic time series analysis. A logit model is applied in order to study the relationship between efficiency and probability of the financial crash. The obtained results reveal that the Chinese financial market tends towards efficiency without attaining totally and we note that the market goes through periods of inefficiency. The results of the logit models suggest always the probability of having a crash increases as the informational efficiency.