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Information Theory and Finance Presentation

by ibercovich on Feb 08, 2010

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The one on the right is 5 million times more likely to trigger the loss
The one on the right is 5 million times more likely to trigger the loss
The one on the right is 5 million times more likely to trigger the loss
The one on the right is 5 million times more likely to trigger the loss

Information Theory and Finance Presentation — Presentation Transcript

How can we say Financial Markets are informationally driven?
Some Empirical Evidence
Q: How do financial institutions price risk? Courtesy of A: Value at risk Mean of both distributions is zero Standard Deviation 100 million For both distributions: 84% VaR 100 million P(x<-100 million) = 0.158 95% VaR 200 million P(x<-200 million) = 0.046 P(x ≤ -100 billion) = ~0 P(x ≤ -636.13 million) = ~0.0000000001 P(x≤-100 billion) = 0.0005 P(x ≤ -636.13 million) = ~0.0005000001 Why is it important to find an alternative financial model
How can we use information theory? Some Definitions
How can we use information theory?
Achievability