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Long Run Law and Entropy

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  • Weidong Tian

Abstract

This paper demonstrates the additive and multiplicative version of a long-run law of unexpected shocks for any economic variable. We derive these long-run laws by the martingale theory without relying on the stationary and ergodic conditions. We apply these long-run laws to asset return, risk-adjusted asset return, and the pricing kernel process and derive new asset pricing implications. Moreover, we introduce several dynamic long-term measures on the pricing kernel process, which relies on the sample data of asset return. Finally, we use these long-term measures to diagnose leading asset pricing models.

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  • Weidong Tian, 2021. "Long Run Law and Entropy," Papers 2111.06238, arXiv.org.
    • Handle: RePEc:arx:papers:2111.06238
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