Entropy-Based Financial Asset Pricing

We investigate entropy as a financial risk measure. Entropy explains the equity premium of securities and portfolios in a simpler way and, at the same time, with higher explanatory power than the beta parameter of the capital asset pricing model. For asset pricing we define the continuous entropy as an alternative measure of risk. Our results show that entropy decreases in the function of the number of securities involved in a portfolio in a similar way to the standard deviation, and that efficient portfolios are situated on a hyperbola in the expected return - entropy system. For empirical investigation we use daily returns of 150 randomly selected securities for a period of 27 years. Our regression results show that entropy has a higher explanatory power for the expected return than the capital asset pricing model beta. Furthermore we show the time varying behaviour of the beta along with entropy.Comment: 21 pages, 6 figures, 3 tables and 4 supporting file

Portfolio Selection with Monotone Mean-Variance Preferences

We propose a portfolio selection model based on a class of preferences that coincide with mean-variance preferences on their domain of monotonicity, but differ where mean-variance preferences fail to be monotone.Portfolio selection. Mean-variance. Risk measures. Convex risk measures. Ambiguity. Robustness. Asymmetric returns.