Analyzing volatility across 13 Nifty Thematic indices: A Shannon Entropy Approach

Abstract

This research investigates the behavior of the Indian stock market over the past decade (January 1, 2014, to April 5, 2024), with a specific focus on the disruptive impact of the Covid-19 pandemic(January 30, 2020, to May 10, 2023). Through a comprehensive analysis of Nifty thematic indices, utilizing Shannon entropy(SE) the study delves into volatility of the indices. The research highlights significant disruptions in market dynamics during the Covid-19 phase, with increased volatility and unpredictability. Use of  Symbolic Time Series Analysis (STSA), for calculation of Shannon Entropy , reduces the disturbances in the time series greatly to capture the true nature of time series . It highlights the varying degrees of uncertainty and predictability across different sectors. Sectors like Nifty Energy and Nifty50 Shariah demonstrate high entropy values, signaling greater unpredictability, while others exhibit more stable dynamics. Overall, this study underscores the importance of understanding market dynamics, particularly during crises, and offers insights to aid investors and policymakers in making informed decisions.