Paper: arXiv 2602.14575

Authors: Eckhard Platen

Abstract

The paper treats the financial market as a communication system, using four information-theoretic assumptions to derive an idealized model with only one parameter. State variables are scalar stationary diffusions. The model minimizes the surprisal of the market and the Kullback-Leibler divergence between the benchmark-neutral pricing measure and the real-world probability measure. The state variables, their sums, and the growth optimal portfolio of the stocks evolve as squared radial Ornstein-Uhlenbeck processes in respective activity times.

Complexity vs Empirical Score

  • Math Complexity: 8.0/10
  • Empirical Rigor: 3.5/10
  • Quadrant: Lab Rats — theoretically deep, empirically untested

Why this score: The paper provides a highly novel mathematical framework by reformulating financial markets via information theory, Lagrangians, and squared radial Ornstein-Uhlenbeck processes. However, as a purely theoretical derivation of an idealized market model, it lacks direct empirical backtesting or code implementation in the provided text.

Research Flowchart

  flowchart TD
    A["Research Goal: Model financial markets as a communication system"] --> B["Key Assumptions: 4 Information-Theoretic axioms & Continuous-Time Diffusion inputs"]
    B --> C["Optimization Process: Minimize Market Surprisal & KL Divergence"]
    C --> D["Derivation: Construct idealized 1-parameter model for scalar stationary state variables"]
    D --> E["Key Outcomes: State variables, sums, & GOP evolve as squared radial Ornstein-Uhlenbeck processes"]