Related papers: Entropy-Based Financial Asset Pricing
The classical combinatorics-based password strength formula provides a result in tens of bits, whereas the NIST Entropy Estimation Suite give a result between 0 and 1 for Min-entropy. In this work, we present a newly developed metric --…
The method of maximum entropy (ME) is extended to address the following problem: Once one accepts that the ME distribution is to be preferred over all others, the question is to what extent are distributions with lower entropy supposed to…
An Entropic Dynamics of exchange rates is laid down to model the dynamics of foreign exchange rates, FX, and European Options on FX. The main objective is to represent an alternative framework to model dynamics. Entropic inference is an…
In this paper, using the shrinkage-based approach for portfolio weights and modern results from random matrix theory we construct an effective procedure for testing the efficiency of the expected utility (EU) portfolio and discuss the…
The principle of absence of arbitrage opportunities allows obtaining the distribution of stock price fluctuations by maximizing its information entropy. This leads to a physical description of the underlying dynamics as a random walk…
The profile of a sample is the multiset of its symbol frequencies. We show that for samples of discrete distributions, profile entropy is a fundamental measure unifying the concepts of estimation, inference, and compression. Specifically,…
We briefly review the approach to optimization of portfolios according to the theory of Markowitz and propose a further modification that can improve the outcome of the optimization process. The modification takes account of the entropic…
In nonlinear dynamics, basins of attraction link a given set of initial conditions to its corresponding final states. This notion appears in a broad range of applications where several outcomes are possible, which is a common situation in…
This paper discusses an alternative explanation for the empirical findings contradicting the positive relationship between risk (variance) and reward (expected return). We show that these contradicting results might be due to the false…
Maximum likelihood estimation applied to high-frequency data allows us to quantify intermittency in the fluctu- ations of asset prices. From time records as short as one month these methods permit extraction of a meaningful intermittency…
We quantify model risk of a financial portfolio whereby a multi-period mean-standard-deviation criterion is used as a selection criterion. In this work, model risk is defined as the loss due to uncertainty of the underlying distribution of…
A transition matrix can be constructed through the partial contraction of two given quantum states. We analyze and compare four different definitions of entropy for transition matrices, including (modified) pseudo entropy, SVD entropy, and…
In this paper, we propose an equilibrium pricing model in a dynamic multi-period stochastic framework with uncertain income streams. In an incomplete market, there exist two traded risky assets (e.g. stock/commodity and weather derivative)…
In this article, we explore properties of pseudo entropy [1] in quantum field theories and spin systems from several approaches. Pseudo entropy is a generalization of entanglement entropy such that it depends on both an initial and final…
The principle of maximum entropy is a broadly applicable technique for computing a distribution with the least amount of information possible constrained to match empirical data, for instance, feature expectations. We seek to generalize…
Inspired by Katok's intermediate entropy property [Inst. Hautes \'Etudes Sci. Publ. Math. 51 (1980), 137-173], we introduce and study the notion of entropy flexibility for discrete-time and continuous-time dynamical systems. By using…
The phenomenon of entropy concentration provides strong support for the maximum entropy method, MaxEnt, for inferring a probability vector from information in the form of constraints. Here we extend this phenomenon, in a discrete setting,…
The thermodynamic definition of entropy can be extended to nonequilibrium systems based on its relation to information. To apply this definition in practice requires access to the physical system's microstates, which may be prohibitively…
Stylized facts of empirical assets log-returns $Z$ include the existence of (semi) heavy tailed distributions $f_Z(z)$ and a non-linear spectrum of Hurst exponents $\tau(\beta)$. Empirical data considered are daily prices of 10 large…
The transfer entropy is a well-established measure of information flow, which quantifies directed influence between two stochastic time series and has been shown to be useful in a variety fields of science. Here we introduce the transfer…