RESEARCH

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The following are the research topics currently being investigated at Entropicdynamics, using the ideas from physics, in particular statistical mechanics.

     


a)  Creating Portfolios that beat Market Returns (Long term investment > 6 yrs)

 

In managing portfolios that are intended to beat the market returns, the risk measure used by most investors, including institutions, is the 'beta' (beta) defined in the Capital Asset Pricing Model(CAPM). The CAPM model which is based on efficient market hypothesis (described in econophysics) was tested by Black, Jensen and Scholes in 1972.  These tests and several other studies, including our own, show that the portfolios kept for long periods (~ 16-18 years), in general, show the behavior of increasing excess returns with increasing risk.  However, for shorter portfolio periods (~ 6 years), or during chaotic periods, the risk return behavior is not always consistent. In fact over the period of investment, sometimes the performance of the portfolio may be poorer than the market performance.  

We have introduced a novel risk measure called Tsallis Relative Entropy (TRE) which is not based on efficient market hypothesis but which is more suited for systems that are turbulent and chaotic such as present day stock markets. Our research shows that risk-return patterns of managed portfolios based on TRE as the risk measure show a more consistent/predictive behavior than those from 'beta' .  

For details see Publication 3  under publications

b)  Options

This research is still in progress  During periods of mild to moderate chaoticity, it is even possible to predict the probabilities of stock  prices over a short period of time (< a month) using non-extensive statistics, in particular Tsallis statistics,   These can then be used to estimate the probabilities of stock prices  below/above  the strike price(put/call ). 



 

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