Efficient Markets Meet the Shannon Limit (The Shannon Limit, Relative Channel Capacity, and Price Uncertainty)

167 Pages Posted: 8 Nov 2014 Last revised: 16 Jan 2015

See all articles by Edgar Parker

Edgar Parker

New York Life Insurance Company

Date Written: October 29, 2014

Abstract

A central concept of this paper is that information theory could help illuminate an important additional source of uncertainty in finance and economics. The communication constraints dictated by information theory have predictable results which fit well with the empirical realities and explain apparent anomalies seen in the markets. Furthermore the new relationships uncovered in this paper offer many novel and perhaps unexpected real life applications outside the realm of existing theories about uncertainty in finance and economics.

Keywords: financial engineering, information theory, Black-Scholes, implied volatility, chaos

JEL Classification: G1, G12, G14, E43

Suggested Citation

Parker, Edgar, Efficient Markets Meet the Shannon Limit (The Shannon Limit, Relative Channel Capacity, and Price Uncertainty) (October 29, 2014). Available at SSRN: https://ssrn.com/abstract=2516557 or http://dx.doi.org/10.2139/ssrn.2516557

Edgar Parker (Contact Author)

New York Life Insurance Company ( email )

51 Madison Avenue
New York, NY 10010
United States

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