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An Entropic Approach to Analyze Investor Utility Involving a Financial Structured Product

Author

Listed:
  • Sukanto Bhattacharya

    (Business Administration Department, Alaska Pacific University, U.S.A.)

  • Kuldeep Kumar

    (Faculty of Business, Bond University, Australia)

Abstract

We propose an entropic model of extrinsic utility arising out of the element of choice regarding portfolio re-balancing strategies available to an individual investor who has chosen to invest in a financial structured product with a terminal payoff same as that from a rainbow option. We also propose a generalization of our posited framework by incorporating a fuzzy measure of probabilistic uncertainty concerning the nature of the structured financial product.

Suggested Citation

  • Sukanto Bhattacharya & Kuldeep Kumar, 2006. "An Entropic Approach to Analyze Investor Utility Involving a Financial Structured Product," Journal of Economics and Management, College of Business, Feng Chia University, Taiwan, vol. 2(2), pages 111-122, July.
    • Handle: RePEc:jec:journl:v:2:y:2006:i:2:p:111-122
    as

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    References listed on IDEAS

    as
    1. Foley Duncan K., 1994. "A Statistical Equilibrium Theory of Markets," Journal of Economic Theory, Elsevier, vol. 62(2), pages 321-345, April.
    2. Sukanto Bhattacharya & Mohammad Khoshnevisan, 2005. "A proposed fuzzy optimal control model to minimise target tracking error in a dynamic hedging problem with a multi-asset, best-of option," Journal of Asset Management, Palgrave Macmillan, vol. 6(2), pages 136-140, August.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    financial structured product; rainbow option; tracking portfolio; investor utility; Shannon entropy; Markov process; fuzzy measure;
    All these keywords.

    JEL classification:

    • C44 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Operations Research; Statistical Decision Theory
    • C65 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Miscellaneous Mathematical Tools
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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