Information Theory and Finance Presentation
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Financial markets are informationally driven because financial institutions use models like value at risk to price risk based on historical data and probabilities of losses. The document discusses how value at risk models work and their limitations, suggesting an alternative model is needed that better incorporates information theory and achievability. It poses questions about how financial institutions price risk and how information theory could provide another perspective.
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Information Theory and Finance Presentation
- 2. How can we say Financial Markets are informationally driven?
- 4. 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
- 5. How can we use information theory? Some Definitions
- 6. How can we use information theory?
Editor's Notes
- #5: The one on the right is 5 million times more likely to trigger the loss
- #6: The one on the right is 5 million times more likely to trigger the loss
- #7: The one on the right is 5 million times more likely to trigger the loss
- #8: The one on the right is 5 million times more likely to trigger the loss