Long Run Law and Entropy

Weidong Tian

Papers from arXiv.org

Abstract: This paper demonstrates the additive and multiplicative version of a long-run law of unexpected shocks for any economic variable. We derive these long-run laws by the martingale theory without relying on the stationary and ergodic conditions. We apply these long-run laws to asset return, risk-adjusted asset return, and the pricing kernel process and derive new asset pricing implications. Moreover, we introduce several dynamic long-term measures on the pricing kernel process, which relies on the sample data of asset return. Finally, we use these long-term measures to diagnose leading asset pricing models.

Date: 2021-11
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Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:2111.06238

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