Volume 88, Number 3, November 2009
Article Number 30007
Number of page(s) 5
Section General
Published online 16 November 2009
EPL, 88 (2009) 30007
DOI: 10.1209/0295-5075/88/30007

Non-extensitivity vs. informative moments for financial models —A unifying framework and empirical results

K. Herrmann

School of Business and Economics, University of Erlangen-Nürnberg Lange Gasse 20, 90403 Nürnberg, Germany, EU

received 5 June 2009; accepted in final form 20 October 2009; published November 2009
published online 16 November 2009

Information-theoretic approaches still play a minor role in financial market analysis. Nonetheless, there have been two very similar approaches evolving during the last years, one in the so-called econophysics and the other in econometrics. Both generalize the notion of GARCH processes in an information-theoretic sense and are able to capture kurtosis better than traditional models. In this article we present both approaches in a more general framework. The latter allows the derivation of a wide range of new models. We choose a third model using an entropy measure suggested by Kapur. In an application to financial market data, we find that all considered models – with similar flexibility in terms of skewness and kurtosis – lead to very similar results.

05.45.Tp - Time series analysis.
05.90.+m - Other topics in statistical physics, thermodynamics, and nonlinear dynamical systems.
89.65.Gh - Economics; econophysics, financial markets, business and management.

© EPLA 2009