Applications of Entropy in Finance: A Review
Rongxi Zhou, Ru Cai and Guanqun Tong *
School of Economics and Management, Beijing University of Chemical Technology, Beijing 100029,
China; E-Mails: zrx103@126.com (R.Z.); cairu0404@sina.com (R.C.)
* Author to whom correspondence should be addressed; E-Mail: tonggq@buct.edu.cn;
Tel.: +86-10-64454290. Fax: +86-10-64438793.
Received: 27 September 2013; in revised form: 20 October 2013 / Accepted: 30 October 2013 /
Published: 11 November 2013
Abstract: Although the concept of entropy is originated from thermodynamics, its concepts
and relevant principles, especially the principles of maximum entropy and minimum
cross-entropy, have been extensively applied in finance. In this paper, we review the
concepts and principles of entropy, as well as their applications in the field of finance,
especially in portfolio selection and asset pricing. Furthermore, we review the effects of the
applications of entropy and compare them with other traditional and new methods.
Keywords: entropy; finance; the principle of maximum entropy; applications; portfolio
selection; asset pricing
PACS Codes: 89.65.-s Social and economic systems
instruction.bus.wisc.edu/jfrees/jfreesbooks/.../Book/.../FreesFinal.pdf
Chapter 7 analyzes several issues that are specific to a longitudinal or panel datastudy. One issue is the choice of the representation to model heterogeneity.
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