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Information Geometry of Risks and Returns

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  • Andrei N. Soklakov

Abstract

We reveal a geometric structure underlying both hedging and investment products. The structure follows from a simple formula expressing investment risks in terms of returns. This informs optimal product designs. Optimal pure hedging (including cost-optimal products) and hybrid hedging (where a partial hedge is built into an optimal investment product) are considered. Duality between hedging and investment is demonstrated with applications to optimal risk recycling. A geometric interpretation of rationality is presented.

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  • Andrei N. Soklakov, 2022. "Information Geometry of Risks and Returns," Papers 2206.08753, arXiv.org, revised Jun 2023.
    • Handle: RePEc:arx:papers:2206.08753
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    References listed on IDEAS

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    1. Andrei N. Soklakov, 2018. "Economics of disagreement -- financial intuition for the R\'enyi divergence," Papers 1811.08308, arXiv.org, revised Aug 2020.
    2. Andrei N. Soklakov, 2015. "One trade at a time -- unraveling the Equity Premium Puzzle," Papers 1507.07214, arXiv.org, revised Aug 2020.
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