The Maximum-Entropy Distribution of the Future Market Price of a Stock
1973; Institute for Operations Research and the Management Sciences; Volume: 21; Issue: 6 Linguagem: Inglês
10.1287/opre.21.6.1200
ISSN1526-5463
AutoresJohn M. Cozzolino, Michael J. Zahner,
Tópico(s)Advanced Thermodynamics and Statistical Mechanics
ResumoThis paper uses the principle of maximum entropy to construct a probability distribution of future stock price for a hypothetical investor having specified expectations. The result obtained is in good agreement with observations recorded in the literature. Thus, the paper concludes that the hypothetical individual investor is representative of a large class of investors. This new derivation of the well known random-walk theory of stock-price movements leads to an improved understanding of the model parameters by relating the variance of the random-walk process to the risk aversion of the investors. A practical use of the model is proposed to help the investor form an objective opinion of his skill.
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