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: Suggested Citation