IDEAS home Printed from https://ideas.repec.org/a/cup/jfinqa/v54y2019i6p2517-2541_8.html
   My bibliography  Save this article

New Entropy Restrictions and the Quest for Better-Specified Asset-Pricing Models

Author

Listed:
  • Bakshi, Gurdip
  • Chabi-Yo, Fousseni

Abstract

This article proposes the entropy of m2 (m is the stochastic discount factor) as a metric to evaluate asset-pricing models. We develop a bound on the entropy of m2 when m correctly prices a finite number of returns and consider models that pass the lower bound on m, yet fail the lower bound on m2. Interpreting our results, we elaborate on the distinction between the entropy of m2 versus the entropy of m. We further show that the entropy of m2 represents an upper bound on the expected excess (log) return of the security with the payoff of m.

Suggested Citation

  • Bakshi, Gurdip & Chabi-Yo, Fousseni, 2019. "New Entropy Restrictions and the Quest for Better-Specified Asset-Pricing Models," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 54(6), pages 2517-2541, December.
    • Handle: RePEc:cup:jfinqa:v:54:y:2019:i:6:p:2517-2541_8
    as

    Download full text from publisher

    File URL: https://www.cambridge.org/core/product/identifier/S0022109018001503/type/journal_article
    File Function: link to article abstract page
    Download Restriction: no
    ---><---

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Harshit Mishra & Parama Barai, 2024. "Entropy Augmented Asset Pricing Model: Study on Indian Stock Market," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 31(1), pages 81-99, March.
    2. Chen, Dongxu & Wu, Ke & Zhu, Yifeng, 2022. "Stock return asymmetry in China," Pacific-Basin Finance Journal, Elsevier, vol. 73(C).
    3. Liu, Yan, 2021. "Index option returns and generalized entropy bounds," Journal of Financial Economics, Elsevier, vol. 139(3), pages 1015-1036.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:cup:jfinqa:v:54:y:2019:i:6:p:2517-2541_8. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Kirk Stebbing (email available below). General contact details of provider: https://www.cambridge.org/jfq .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.