Eur. Phys. J. Special Topics 229, 1715–1733 (2020)
https://doi.org/10.1140/epjst/e2020-900124-y

Regular Article

Maximum entropy approach to market fluctuations as a promising alternative

Nevsehir Haci Bektas Veli University, Nevsehir, Turkey

^a e-mail: ocender@nevsehir.edu.tr

Received: 29 June 2019
Received in final form: 21 September 2019
Published online: 7 July 2020

Abstract

Conventional models studying market fluctuations often suffer from over simplifying assumptions of highly complex economic systems. A brief but critical review is given of “conventional” economic theory and modeling approaches. A detailed discussion contrasts various approaches to modeling market fluctuations which introduce more realistic frameworks than conventional models; namely, Log Periodic Power Law Models (LPPL), Heterogenous Agent Models (i.e. Simple Heterogenous Models and Agent Based Models), and Quantal Response Statistical Equilibrium Models (QRSE). From this review, a clear picture is formed for the capacity for each of these approaches to overcome existing problems in economic theory and modeling of large complex systems. QRSE framework as an “Information Theoretic Maximum Entropy Approach” is presented here and discussed with special emphasis on the explanatory power and physical meaning of the model parameters regarding their economic interpretation and significance, and its simple modeling framework.