 THE ENTROPIC MARKET HYPOTHESISLes Gulko ()
International Journal of Theoretical and Applied Finance (IJTAF), 1999, vol. 02, issue 03, 293-329 Abstract: Information theory teaches that entropy is the fundamental limit for data compression, and electrical engineers routinely use entropy as a criterion for efficient storage and transmission of information. Since modern financial theory teaches that competitive market prices store and transmit information with some efficiency, should financial economists be concerned with entropy? This paper presents a market model in which entropy emerges endogenously as a condition for the operational efficiency of price discovery while entropy maximization emerges as a condition for the informational efficiency of market prices. The maximum-entropy formalism makes the efficient market hypothesis operational and testable. This formalism is used to establish that entropic markets admit no arbitrage and support both the Ross arbitrage pricing theory and the Black–Scholes stock option pricing model. Date: 1999 Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:wsi:ijtafx:v:02:y:1999:i:03:n:s0219024999000170 Ordering information: This journal article can be ordered from DOI: 10.1142/S0219024999000170 Access Statistics for this article International Journal of Theoretical and Applied Finance (IJTAF) is currently edited by L P Hughston More articles in International Journal of Theoretical and Applied Finance (IJTAF) from World Scientific Publishing Co. Pte. Ltd. |
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