Entropy-based financial asset pricing: Evidence from Pakistan

Sheng Wang, Sher Ali Khan, Mubbasher Munir, Reda Alhajj and Yousaf Ali Khan

PLOS ONE, 2022, vol. 17, issue 12, 1-14

Abstract: Entropy is an alternative measure to calculate the risk, simplify the portfolios and equity risk premium. It has higher explanatory power than capital asset price model (CAPM) beta. The comparison of Entropy and CAPM beta provide in depth analysis about the explanatory power of the model that in turn help investor to make right investment decisions that minimizes risk. In this context, this study aims to compare Shannon and Rennyi Entropies with the CAPM beta for measuring the risk. Ordinary Least square approach has been utilized using a dataset of 67 enterprises registered in Pakistan Stock exchange. The comparative analysis of CAPM beta and entropy has been carried out with the R2 parameters. The result indicates that entropy has more explanatory power as compare to CAPM beta’s explanatory power, and this turns out to be the best option to evaluate the risk performances. The result implies that an investor should make the best investment decision by choosing an enterprise that provide with good returns at minimum risk based on entropy technique.

Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://journals.plos.org/plosone/article?id=10.1371/journal.pone.0278236 (text/html)
https://journals.plos.org/plosone/article/file?id= ... 78236&type=printable (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:plo:pone00:0278236

DOI: 10.1371/journal.pone.0278236

Access Statistics for this article

More articles in PLOS ONE from Public Library of Science
Bibliographic data for series maintained by plosone ().