The Signal, Entropic Finance, and the Digital Economy: (New Perspectives at the Intersection of Information Theory, Entropy, and Finance) - Softcover

Parker Jr, Edgar

9781794393103: The Signal, Entropic Finance, and the Digital Economy: (New Perspectives at the Intersection of Information Theory, Entropy, and Finance)

Softcover

ISBN 10: 1794393102 ISBN 13: 9781794393103

Publisher: Independently published, 2019

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The following work identifies a new source of quantifiable risk in financial applications. Traditional economic and financial theories tend to ignore the limits on information communication and computation with notable exceptions such as Sims(2010). This is in spite of the fact that the science of such limits is well understood. Information and information processing have been treated qualitatively as either perfect or imperfect with little effort to incorporate them in a precise and practical way. Over the years this omission has become even more egregious given the data driven and digitally dominated world in which the vast majority of financial activity takes place. In addition to building new theoretical foundations, practical applications of the theory to problems in finance are suggested in this work. In the first chapter the concept of the economy’s information processing efficiency is intuitively introduced. The theory is expanded in Chapter 2 which explores the relationships between the arrival and processing rates of information at financial markets. This analysis is used to demonstrate mathematically how financial flash crashes can occur without large changes in the information arrival process. In chapter 3 the economy’s information processing efficiency (R/C) is theoretically and empirically derived from a reformulation of the yield curve. The theory is also intuitively extended to explain in a new way the large-scale declines in the markets typically seen at the end of business cycles. The full evolution of the business cycle is described from the perspective of this new theory and measure in Chapter 4. The new measure is used in Chapter 5 to improve portfolio management over business cycles in conjunction with more traditional methods. The fractal structure of R/C is explored mathematically and explained metaphorically in Chapter 6. In the last chapter the theory elucidates a previously unknown and important connection between the disparate branches of finance and opens many new vistas for future research and real-world applications.

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