Entropy corrected geometric Brownian motion
Data Analysis, Statistics and Probability
2024-03-19 v2 Statistical Finance
Abstract
The geometric Brownian motion (GBM) is widely employed for modeling stochastic processes, yet its solutions are characterized by the log-normal distribution. This comprises predictive capabilities of GBM mainly in terms of forecasting applications. Here, entropy corrections to GBM are proposed to go beyond log-normality restrictions and better account for intricacies of real systems. It is shown that GBM solutions can be effectively refined by arguing that entropy is reduced when deterministic content of considered data increases. Notable improvements over conventional GBM are observed for several cases of non-log-normal distributions, ranging from a dice roll experiment to real world data.
Cite
@article{arxiv.2403.06253,
title = {Entropy corrected geometric Brownian motion},
author = {Rishabh Gupta and Ewa A. Drzazga-Szczȩśniak and Sabre Kais and Dominik Szczȩśniak},
journal= {arXiv preprint arXiv:2403.06253},
year = {2024}
}
Comments
6 pages, 5 figures