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Information-Theoretic Approach to Financial Market Modelling

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  • Eckhard Platen

Abstract

The paper treats the financial market as a communication system, using four information-theoretic assumptions to derive an idealized model with only one parameter. State variables are scalar stationary diffusions. The model minimizes the surprisal of the market and the Kullback-Leibler divergence between the benchmark-neutral pricing measure and the real-world probability measure. The state variables, their sums, and the growth optimal portfolio of the stocks evolve as squared radial Ornstein-Uhlenbeck processes in respective activity times.

Suggested Citation

  • Eckhard Platen, 2026. "Information-Theoretic Approach to Financial Market Modelling," Papers 2602.14575, arXiv.org.
    • Handle: RePEc:arx:papers:2602.14575
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    File URL: http://arxiv.org/pdf/2602.14575
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