Related papers: Entropy-Based Financial Asset Pricing
Diversification is a cornerstone of robust portfolio construction, yet its application remains fraught with challenges due to model uncertainty and estimation errors. Practitioners often rely on sophisticated, proprietary heuristics to…
Preserving biodiversity and ecosystem stability is a challenge that can be pursued through modern statistical mechanics modeling. Here we introduce a variational maximum entropy-based algorithm to evaluate the entropy in a minimal ecosystem…
Scale invariance, collective behaviours and structural reorganization are crucial for portfolio management (portfolio composition, hedging, alternative definition of risk, etc.). This lack of any characteristic scale and such elaborated…
In this paper we present an interacting-agent model of stock markets. We describe a stock market through an Ising-like model in order to formulate the tendency of traders getting to be influenced by the other traders' investment attitudes…
This work demonstrates how the concept of the entropic potential of events -- a parameter quantifying the influence of discrete events on the expected future entropy of a system -- can enhance uncertainty quantification, decision-making,…
Entropy is a very useful concept from physics that tries to explain how a system behaves from a point of view of the thermodynamics. However, there are two ways to explain entropy, and it depends on if we are studying a microsystem or a…
We describe an approach to improving model fitting and model generalization that considers the entropy of distributions of modelling residuals. We use simple simulations to demonstrate the observational signatures of overfitting on ordered…
We extend the notion of estimation entropy of autonomous dynamical systems proposed by Liberzon and Mitra [1] to nonlinear dynamical systems with uncertain inputs with bounded variation. We call this new notion the {$\epsilon$}-estimation…
Non Performing Asset(NPA) has been in a serious attention by banks over the past few years. NPA cause a huge loss to the banks hence it becomes an extremely critical step in deciding which loans have the capabilities to become an NPA and…
In this paper we aim to find a measure for the diversity of cash flows between agents in an economy. We argue that cash flows can be linked to probabilities of finding a currency unit in a given cash flow. We then use the information…
Entropy regularization is known to improve exploration in sequential decision-making problems. We show that this same mechanism can also lead to nearly unbiased and lower-variance estimates of the mean reward in the optimize-and-estimate…
We propose utilizing entropy as a diagnostic tool to distinguish between constant and dynamical dark energy models. Entropy, a measure of the system's disorder or information content, captures the complexity and evolution of the universe.…
Estimating the covariance of asset returns, i.e., the risk model, is a key component of financial portfolio construction and evaluation. Most risk modeling approaches produce a factor model that decomposes the asset variability into two…
We discuss the foundations of factor or regression models in the light of the self-consistency condition that the market portfolio (and more generally the risk factors) is (are) constituted of the assets whose returns it is (they are)…
We apply the maximum entropy principle to economic systems in equilibrium and find the density function for the market's wealth. This is the same as price density which is used for insurance pricing. The risk aversion parameter of the agent…
We study portfolio selection in a complete continuous-time market where the preference is dictated by the rank-dependent utility. As such a model is inherently time inconsistent due to the underlying probability weighting, we study the…
Various lower bounds are established for the entropy of sums, products and their combinations. First, we derive a prime-field analogue of a version of the entropy power inequality established by Tao over torsion-free groups. Next, we prove…
We obtain a lower asymptotic bound on the decay rate of the probability of a portfolio's underperformance against a benchmark over a large time horizon. It is assumed that the prices of the securities are governed by geometric Brownian…
Natural capital accounting is important to efforts that attempt to measure the value of nature to decide on how best to trade-off natural resource productive use and conservation. Much work on measuring reciprocal physical stocks and flows…
We consider the problem of finite sample corrections for entropy estimation. New estimates of the Shannon entropy are proposed and their systematic error (the bias) is computed analytically. We find that our results cover correction…