Information Geometry of Risks and Returns

Risk, June (2023)

25 Pages Posted: 17 Jun 2022 Last revised: 4 Jun 2023

Date Written: June 9, 2022

Abstract

We reveal a geometric structure underlying both hedging and investment products. The structure follows from a simple formula expressing investment risks in terms of returns. This informs optimal product designs. Optimal pure hedging (including cost-optimal products) and hybrid hedging (where a partial hedge is built into an optimal investment product) are considered. Duality between hedging and investment is demonstrated with applications to optimal risk recycling. A geometric interpretation of rationality is presented.

Keywords: Information derivatives, Rationality, Product design, Information geometry

JEL Classification: C00, D82, D87, G00

Suggested Citation

Soklakov, Andrei N., Information Geometry of Risks and Returns (June 9, 2022). Risk, June (2023), Available at SSRN: https://ssrn.com/abstract=4134885 or http://dx.doi.org/10.2139/ssrn.4134885

Andrei N. Soklakov (Contact Author)

Citigroup, Inc. ( email )

399 Park Avenue
6th Floor
New York, NY 10043
United States

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