Related papers: Entropy-Based Financial Asset Pricing
We obtain the maximum entropy distribution for an asset from call and digital option prices. A rigorous mathematical proof of its existence and exponential form is given, which can also be applied to legitimise a formal derivation by Buchen…
Maximum entropy method is a constructive criterion for setting up a probability distribution maximally non-committal to missing information on the basis of partial knowledge, usually stated as constrains on expectation values of some…
A simple statement and accessible proof of a version of the Fundamental Theorem of Asset Pricing in discrete time is provided. Careful distinction is made between prices and cash flows in order to provide uniform treatment of all…
We propose to examine the predictability and the complexity characteristics of the Standard&Poor500 dynamics behaviors in a coarse-grained way using the symbolic dynamics method and under the prism of the Information theory through the…
We study a discrete-time consumption-based capital asset pricing model under expectations-based reference-dependent preferences. More precisely, we consider an endowment economy populated by a representative agent who derives utility from…
Selecting stock portfolios and assessing their relative volatility risk compared to the market as a whole, market indices, or other portfolios is of great importance to professional fund managers and individual investors alike. Our research…
The problem of assigning probability distributions which objectively reflect the prior information available about experiments is one of the major stumbling blocks in the use of Bayesian methods of data analysis. In this paper the method of…
Typically, the entropy of an isolated system in equilibrium is calculated by counting the number of accessible microstates, or in more general cases by using the Gibbs formula. In irreversible processes entropy spontaneously increases and…
We consider a financial market in which two securities are traded: a stock and an index. Their prices are assumed to satisfy the Black-Scholes model. Besides assuming that the index is a tradable security, we also assume that it is…
We introduce a trade strategy representation theorem for performance measurement and portable alpha in high frequency trading, by embedding a robust trading algorithm that describe portfolio manager market timing behavior, in a canonical…
We apply empirical Bayes (EB) to mine data on 136,000 long-short strategies constructed from accounting ratios, past returns, and ticker symbols. This ``high-throughput asset pricing'' matches the out-of-sample performance of top journals…
Most methodologies for materials criticality assessment score supply risk and societal importance. Market-based criteria offer quantitative measures for assessment. Here we develop a statistical approach based on a geologic entropy function…
Systems coupled to multiple thermodynamic reservoirs can exhibit nonequilibrium dynamics, breaking detailed balance to generate currents. To power these currents, the entropy of the reservoirs increases. The rate of entropy production, or…
This paper introduces an approach to gas-like models, from the concept of entropy, using the money stock data of two economic agents, in this case of two countries, which carry out market actions (trading) in two theoretical scenarios: in…
This work presents an asset pricing model that under rational expectation equilibrium perspective shows how, depending on risk aversion and noise volatility, a risky-asset has one equilibrium price that differs in term of efficiency: an…
The risk premia of traded factors are the sum of factor means and a parameter vector we denote by {\phi} which is identified from the cross section regression of alpha of individual securities on the vector of factor loadings. If phi is…
Machine learning in asset pricing typically predicts expected returns as point estimates, ignoring uncertainty. We develop new methods to construct forecast confidence intervals for expected returns obtained from neural networks. We show…
There are three ways to conceptualize entropy: entropy as an extensive thermodynamic quantity of physical systems (Clausius, Boltzmann, Gibbs), entropy as a measure for information production of ergodic sources (Shannon), and entropy as a…
Volatility is the canonical measure of financial risk, a role largely inherited from Modern Portfolio Theory. Yet, its universality rests on restrictive efficiency assumptions that render volatility, at best, an incomplete proxy for true…
Although the valuation of life contingent assets has been thoroughly investigated under the framework of mathematical statistics, little financial economics research pays attention to the pricing of these assets in a non-arbitrage, complete…