The relationship between risk and incomplete states uncertainty: a Tsallis entropy perspective

Oren J. Tapiero ()
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Oren J. Tapiero: Université Paris 1 Panthéon-Sorbonne, Postal: Université Paris 1 Panthéon-Sorbonne (LabEx-ReFi), Paris, France, Tel-Aviv Academic College, Tel-Aviv, Israe

Algorithmic Finance, 2013, vol. 2, issue 2, 141-150

Abstract: This paper provides a “non-extensive” information theoretic perspective on the relationship between risk and incomplete states uncertainty. Theoretically and empirically, we demonstrate that a substitution effect between the latter two may take place. Theoretically, the “non-extensive” volatility measure is concave with respect to the standard (based on normal distribution) volatility measure. With the degree of concavity depending on an incomplete states uncertainty parameter-the Tsallis-q. Empirically, the latter negatively causes the normal measure of volatility, positively affecting the tails of the distribution of realised log-returns.

Keywords: Tsallis Entropy; Incomplete Statistics; Volatility; Uncertainty (search for similar items in EconPapers)
JEL-codes: D00 E00 (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:ris:iosalg:0020

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