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

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

Corresponding author: klaus.herrmann@wiso.uni-erlangen.de

Received: 5 June 2009
Accepted: 20 October 2009

Abstract

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.