# Tail Risk Constraints and Maximum Entropy

@article{Geman2015TailRC, title={Tail Risk Constraints and Maximum Entropy}, author={Donald Geman and H{\'e}lyette Geman and Nassim Nicholas Taleb}, journal={Entropy}, year={2015}, volume={17}, pages={3724-3737} }

Portfolio selection in the financial literature has essentially been analyzed under two central assumptions: full knowledge of the joint probability distribution of the returns of the securities that will comprise the target portfolio; and investors’ preferences are expressed through a utility function. In the real world, operators build portfolios under risk constraints which are expressed both by their clients and regulators and which bear on the maximal loss that may be generated over a…

## 16 Citations

Maximum Varma Entropy Distribution with Conditional Value at Risk Constraints

- Economics, BusinessEntropy
- 2020

It is shown that the maximum entropy distribution with Conditional Value at Risk constraints is a power law, which means that the mean and variance constraints were still used to obtain Lagrangian multipliers.

Maximum Entropy Evaluation of Asymptotic Hedging Error under a Generalised Jump-Diffusion Model

- MathematicsJournal of Risk and Financial Management
- 2015

In this paper we propose a maximum entropy estimator for the asymptotic distribution of the hedging error for options. Perfect replication of financial derivatives is not possible, due to market…

An Entropy-Based Approach to Portfolio Optimization

- Computer ScienceEntropy
- 2020

A new family of portfolio optimization problems called the return-entropy portfolio optimization (REPO) is introduced that simplifies the computation of portfolio entropy using a combinatorial approach.

An energy-based measure for long-run horizon risk quantification

- BusinessAnn. Oper. Res.
- 2020

A novel risk quantification method exploiting the time-evolving energy distribution of returns, expressed by the sum of squared magnitudes of a set of transform coefficients, which can be coupled with the commonly used quantile-based risk measures to enhance their performance.

Modeling Expected Shortfall Using Tail Entropy

- EconomicsEntropy
- 2019

This paper proposes a simple nonparametric tail measure of risk based on information entropy and compares its backtesting performance with that of other standard ES models.

Does Income Diversification Benefit the Sustainable Development of Chinese Listed Banks? Analysis Based on Entropy and the Herfindahl–Hirschman Index

- EconomicsEntropy
- 2018

A panel threshold model is built and investigated the effect of income diversification on a bank’s profitability and risk and believes the combination of the entropy index (ENTI) and the HHI enables more efficient study of the relationship between diversification and profitability or risk more efficiently.

An Entropy-Based Approach to Measurement of Stock Market Depth

- EconomicsEntropy
- 2021

Results indicate that the entropy-based approach can be considered as an auspicious market depth and liquidity proxy with an intuitive base for both theoretical and empirical analyses in financial markets.

Modeling Very Large Losses

- Economics
- 2018

In this paper, we present a simple probabilistic model for aggregating very large losses into a loss collection. This supposes that “standard” losses come in various possible sizes – small, moderate…

Operational Risk Measurement Beyond the Loss Distribution Approach: An Exposure-Based Methodology

- Computer Science
- 2018

This paper presents an alternative quantification technique, so-called exposure-based operational risk (EBOR) models, which aim to replace historical severity curves by measures of current exposures and use event frequencies based on actual exposures instead of historical loss counts.

An Autonomy Interrogative

- Economics
- 2018

This chapter considers autonomy as an economic concern, meaning as a matter of determining the outcomes from different ways of allocating scarce resources in a social setting under conditions of fundamental uncertainty, and proposes plasticity as the maximum class that an organism, system, organisation or thing may successfully handle.

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