Information Geometry of Risks and Returns
General Economics
2023-06-05 v3 Information Theory
math.IT
Economics
General Finance
Abstract
We reveal a geometric structure underlying both hedging and investment products. The structure follows from a simple formula expressing investment risks in terms of returns. This informs optimal product designs. Optimal pure hedging (including cost-optimal products) and hybrid hedging (where a partial hedge is built into an optimal investment product) are considered. Duality between hedging and investment is demonstrated with applications to optimal risk recycling. A geometric interpretation of rationality is presented.
Cite
@article{arxiv.2206.08753,
title = {Information Geometry of Risks and Returns},
author = {Andrei N. Soklakov},
journal= {arXiv preprint arXiv:2206.08753},
year = {2023}
}
Comments
25 pages, 2 figures