HOW TO PRICE INFORMATION BY KULLBACK-LEIBLER ENTROPY AND A MOMENT-RETURN RELATION FOR PORTFOLIOS

Andreas de Vries ()
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Andreas de Vries: WestLB, D-40199 Düsseldorf, Germany, Märkische FH, University of Applied Sciences, Haldener Strasse 182, D-58095 Hagen, Germany

International Journal of Theoretical and Applied Finance (IJTAF), 2001, vol. 04, issue 03, 535-543

Abstract: A connection between the notion of information and the concept of risk and return in portfolio theory is deduced. This succeeds in two steps: A general moment-return relation for arbitrary assets is derived, thereafter the total expected return is connected to the Kullback-Leibler information. With this result the optimization problem to maximize the expected return of a portfolio consisting ofnsubportfolios by moment variation under a given value-at-risk constraint is solved. This yields an ansatz to price information.

Keywords: Information theory; financial markets; portfolio theory (search for similar items in EconPapers)
Date: 2001
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DOI: 10.1142/S0219024901001103

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