Related papers: Entropy-Based Financial Asset Pricing
In the information-based approach to asset pricing the market filtration is modelled explicitly as a superposition of signals concerning relevant market factors and independent noise. The rate at which the signal is revealed to the market…
We introduce the entropic measure transform (EMT) problem for a general process and prove the existence of a unique optimal measure characterizing the solution. The density process of the optimal measure is characterized using a…
Short-term patterns in financial time series form the cornerstone of many algorithmic trading strategies, yet extracting these patterns reliably from noisy market data remains a formidable challenge. In this paper, we propose an…
Equity premium, the surplus returns of stocks over bonds, has been an enduring puzzle. While numerous prior works approach the problem assuming the utility of money is invariant across contexts, our approach implies that in efficient…
Financial markets typically exhibit dynamically complex properties as they undergo continuous interactions with economic and environmental factors. The Efficient Market Hypothesis indicates a rich difference in the structural complexity of…
In this paper, I expand Shannon's definition of entropy into a new form of entropy that allows integration of information from different random events. Shannon's notion of entropy is a special case of my more general definition of entropy.…
Covariate balance is a conventional key diagnostic for methods used estimating causal effects from observational studies. Recently, there is an emerging interest in directly incorporating covariate balance in the estimation. We study a…
In this brief review, we critically examine the recent work done on correlation-based networks in financial systems. The structure of empirical correlation matrices constructed from the financial market data changes as the individual stock…
A solution to a portfolio optimization problem is always conditioned by constraints on the initial capital and the price of the available market assets. If a risk neutral measure is known, then the price of each asset is the discounted…
Beta is a widely used quantity in investment analysis. We review the common interpretations that are applied to beta in finance and show that the standard method of estimation - least squares regression - is inconsistent with these…
Despite half a century of research, there is still no general agreement about the optimal approach to build a robust multi-period portfolio. We address this question by proposing the detrended cluster entropy approach to estimate the…
Entropy rate of sequential data-streams naturally quantifies the complexity of the generative process. Thus entropy rate fluctuations could be used as a tool to recognize dynamical perturbations in signal sources, and could potentially be…
Entropy measures have become increasingly popular as an evaluation metric for complexity in the analysis of time series data, especially in physiology and medicine. Entropy measures the rate of information gain, or degree of regularity in a…
The time variation of entropy, as an alternative to the variance, is proposed as a measure of the diffusion rate. It is shown that for linear and time-translationally invariant systems having a large-time limit for the density, at large…
We introduce an equilibrium asset pricing model, which we build on the relationship between a novel risk measure, the Expected Downside Risk (EDR) and the expected return. On the one hand, our proposed risk measure uses a nonparametric…
The equity risk premium puzzle is that the return on equities has far exceeded the average return on short-term risk-free debt and cannot be explained by conventional representative-agent consumption based equilibrium models. We review a…
This paper introduces a comprehensive framework for Financial Information Theory by applying information-theoretic concepts such as entropy, Kullback-Leibler divergence, mutual information, normalized mutual information, and transfer…
Inferring models, predicting the future, and estimating the entropy rate of discrete-time, discrete-event processes is well-worn ground. However, a much broader class of discrete-event processes operates in continuous-time. Here, we provide…
Earlier studies have shown that stock market distributions can be well described by distributions derived from Tsallis entropy, which is a generalization of Shannon entropy to non-extensive systems. In this paper, Tsallis relative entropy…
Entropy, its production, and its change in a dynamical system can be understood from either a fully stochastic dynamic description or from a deterministic dynamics exhibiting chaotic behavior. By taking the former approach based on the…