Portfolio optimization with transfer entropy constraints

Omid M. Ardakani

International Review of Financial Analysis, 2024, vol. 96, issue PA

Abstract: This paper integrates transfer entropy (TE) within the portfolio optimization framework to account for dependencies among assets. This approach helps mitigate systemic risk and create portfolios that are resilient to asymmetric information flows. Key contributions of this study include (1) demonstrating the impact of TE constraints on portfolio diversification and stability, (2) linking TE thresholds to the Herfindahl–Hirschman Index to quantify this effect, and (3) establishing the coherence of a TE-integrated multivariate entropic risk measure using extreme value theory. Empirical analyses of a diversified portfolio, including traditional and contemporary asset classes, reveal that TE constraints effectively modulate portfolio stability and offer a robust alternative to conventional risk measures such as Value at Risk and Conditional Value at Risk.

Keywords: Coherence; Extreme value theory; Optimization; Risk measure; Transfer entropy (search for similar items in EconPapers)
JEL-codes: C58 C61 G11 G17 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:96:y:2024:i:pa:s1057521924005763

DOI: 10.1016/j.irfa.2024.103644

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