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Fisher information and equilibrium distributions in econophysics. (English) Zbl 1118.81362

Summary: We present a novel application of constrained Fisher information: the reconstruction of probability densities implicit in financial security prices. We illustrate the potential of this method by calculating the densities implicit in bond and option prices and find the resulting densities to be in accord with commonly held priors concerning density smoothness. We also show that the Cramer-Rao bound can be used to generalize the concept of asset-price volatility.

MSC:

91G80 Financial applications of other theories
91B80 Applications of statistical and quantum mechanics to economics (econophysics)
91G20 Derivative securities (option pricing, hedging, etc.)
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