title: Entropies of negative incomes, Pareto-distributed loss, and financial crises.
abstract: Health monitoring of world economy is an important issue, especially in a time of profound economic difficulty world-wide. The most important aspect of health monitoring is to accurately predict economic downturns. To gain insights into how economic crises develop, we present two metrics, positive and negative income entropy and distribution analysis, to analyze the collective "spatial" and temporal dynamics of companies in nine sectors of the world economy over a 19 year period from 1990-2008. These metrics provide accurate predictive skill with a very low false-positive rate in predicting downturns. The new metrics also provide evidence of phase transition-like behavior prior to the onset of recessions. Such a transition occurs when negative pretax incomes prior to or during economic recessions transition from a thin-tailed exponential distribution to the higher entropy Pareto distribution, and develop even heavier tails than those of the positive pretax incomes. These features propagate from the crisis initiating sector of the economy to other sectors.
authors: PMB Intelligence LLC, West Lafayette, Indiana, United States of America. jbgao@pmbintelligence.com
authors: Jianbo
authors: J
authors: Gao
authors: Jing
authors: J
authors: Hu
authors: Xiang
authors: X
authors: Mao
authors: Mi
authors: M
authors: Zhou
authors: Brian
authors: B
authors: Gurbaxani
authors: Johnny
authors: J
authors: Lin
mesh_terms: D057172:Economic Recession / Q000706:statistics & numerical data*; D019277:Entropy; D005376:Financial Management / Q000191:economics*; D007182:Income / Q000706:statistics & numerical data*; D038622:Internationality; D018803:Models, Economic