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 fat-tailed conditional asset return distributions

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.

Some are interested in the probability distributions of single asset returns in their own right (see, for example, references cited in or Stoyanov et al, 2011). Others (see, for example, Jondeau & Rockinger, 2006) are more