Related papers: Entropy-Based Financial Asset Pricing
The investor is interested in the expected return and he is also concerned about the risk and the uncertainty assumed by the investment. One of the most popular concepts used to measure the risk and the uncertainty is the variance and/or…
We introduce a pathwise approach to analyze the relative performance of an equity portfolio with respect to a benchmark market portfolio. In this energy-entropy framework, the relative performance is decomposed into three components: a…
Accounting for the non-normality of asset returns remains challenging in robust portfolio optimization. In this article, we tackle this problem by assessing the risk of the portfolio through the "amount of randomness" conveyed by its…
This thesis applies entropy as a model independent measure to address three research questions concerning financial time series. In the first study we apply transfer entropy to drawdowns and drawups in foreign exchange rates, to study their…
Entropy is a measure of self-information which is used to quantify losses. Entropy was developed in thermodynamics, but is also used to compare probabilities based on their deviating information content. Corresponding model uncertainty is…
Entropy based ideas find wide-ranging applications in finance for calibrating models of portfolio risk as well as options pricing. The abstracted problem, extensively studied in the literature, corresponds to finding a probability measure…
We discuss the role of information entropy on the behaviour of random processes, and how this might take effect in the dynamics of financial market prices. We then go on to show how the Open Quantum Systems approach can be used as a more…
An increase in the novelty of news predicts negative stock market returns and negative macroeconomic outcomes over the next year. We quantify news novelty - changes in the distribution of news text - through an entropy measure, calculated…
As operators acting on the undetermined final settlement of a derivative security, expectation is linear but price is non-linear. When the market of underlying securities is incomplete, non-linearity emerges from the bid-offer around the…
Equity risk premium is a central component of every risk and return model in finance and a key input to estimate costs of equity and capital in both corporate finance and valuation. An article by Damodaran examines three broad approaches…
Grasping the historical volatility of stock market indices and accurately estimating are two of the major focuses of those involved in the financial securities industry and derivative instruments pricing. This paper presents the results of…
Entropy has emerged as a dynamic, interdisciplinary, and widely accepted quantitative measure of uncertainty across different disciplines. A unified understanding of entropy measures, supported by a detailed review of their theoretical…
This article introduces an intrinsic entropy model that can be used as an indicator to gauge investor interest in a given exchange-traded security, along with the state of the general market corroborated by individual security trade data.…
In the market place, diversification reduces risk and provides protection against extreme events by ensuring that one is not overly exposed to individual occurrences. We argue that diversification is best measured by characteristics of the…
Providing a measure of market risk is an important issue for investors and financial institutions. However, the existing models for this purpose are per definition symmetric. The current paper introduces an asymmetric capital asset pricing…
We investigate the relative information efficiency of financial markets by measuring the entropy of the time series of high frequency data. Our tool to measure efficiency is the Shannon entropy, applied to 2-symbol and 3-symbol…
Entropy is a measure of heterogeneity widely used in applied sciences, often when data are collected over space. Recently, a number of approaches has been proposed to include spatial information in entropy. The aim of entropy is to…
Factor modeling of asset returns has been a dominant practice in investment science since the introduction of the Capital Asset Pricing Model (CAPM) and the Arbitrage Pricing Theory (APT). The factors, which account for the systematic risk,…
Beta-sorted portfolios -- portfolios comprised of assets with similar covariation to selected risk factors -- are a popular tool in empirical finance to analyze models of (conditional) expected returns. Despite their widespread use, little…
Here we deconstruct, and then in a reasoned way reconstruct, the concept of "entropy of a system," paying particular attention to where the randomness may be coming from. We start with the core concept of entropy as a COUNT associated with…