Fat tails via utility-based entropy

Asset returns are well known to be fat-tailed, but widely used classical econometric techniques are not well suited for building such distributions. Craig Friedman, Yangyong Zhang and Wenbo Cao use a minimum relative utility-based entropy principle to estimate the fat-tailed conditional asset return distributions sought by traders and risk managers

Practitioners and researchers concerned with describing and managing risk or discovering trading strategies for alpha-capture often construct and study conditional probabilistic models of the behaviour of asset returns, given the values of various explanatory variables.

Fat tails via utility-based entropy