Entropy Production and Technological Progress: The Yin and Yang of Economics and Finance

76 Pages Posted: 2 Nov 2015 Last revised: 19 Jan 2017

See all articles by Edgar Parker

Edgar Parker

New York Life Insurance Company

Date Written: May 31, 2015

Abstract

All economic and financial activity involves the communication of information across space and time. Additionally, communicated and processed information is the only universal fundamental input to all economic and financial production and exchange. Well established laws from physics and information theory determine the evolution of entropy, the limits on information communication and processing, and the growth of additional uncertainty or entropy as those limits are exceeded. Apparent anomalies such as non-constant implied volatilities across strikes and terms to expiration, and the complete structure of the yield curve arise intuitively when information theory is applied to economics and finance. In fact the current methods used by practitioners to model the volatility surface and the yield curve can be viewed as approximations of the richer structures revealed by information theory.

Keywords: Entropy, Volatility Surface, Information Theory, Implied Volatility, Entropy, Yield Curve

JEL Classification: E43, G12, G14, G170

Suggested Citation

Parker, Edgar, Entropy Production and Technological Progress: The Yin and Yang of Economics and Finance (May 31, 2015). Available at SSRN: https://ssrn.com/abstract=2684841 or http://dx.doi.org/10.2139/ssrn.2684841

Edgar Parker (Contact Author)

New York Life Insurance Company ( email )

51 Madison Avenue
New York, NY 10010
United States

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