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May 6, 2026Open Access

Thermonance: A Theoretical Framework for Entropy-Based Early Warning in Financial Markets

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Authors

HKHikmat KarimovRARahid Alekberli

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Overview

Position paper proposes a theoretical framework for financial market early warning, suggesting future empirical validation.

Key Points

  • This paper aims to introduce a theoretical framework that applies a seismological early warning model to financial market conditions.
  • Defined financial Causal Entropic Response (fCer) using order-flow imbalance entropy, volume entropy, and bid-ask spread entropy.
  • Conducted enhanced Monte Carlo simulation with 2,190 trading-day equivalents and 15 crash events over three severity levels.
  • Derived two formulations of fCer for theoretical analysis and practical application.
  • Achieved AUC = 0.96 for simplified fCer and AUC = 0.79 for derivative-based full fCer at a 25-day lead time.
  • Results confirm mathematical self-consistency through simulations but do not establish predictive validity for real markets.

Cite This Study

Karimov et al. (2026) studied this question.

synapsesocial.com/papers/69fadb0b03f892aec9b1e91fhttps://doi.org/10.5281/zenodo.20028855
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