Entropy-based financial asset pricing: Evidence from Pakistan

Creative Commons License

Wang S., Khan S. A., Munir M., ALHAJJ R., Khan Y. A.

PLoS ONE, cilt.17, sa.12 December, 2022 (SCI-Expanded) identifier identifier identifier

  • Yayın Türü: Makale / Tam Makale
  • Cilt numarası: 17 Sayı: 12 December
  • Basım Tarihi: 2022
  • Doi Numarası: 10.1371/journal.pone.0278236
  • Dergi Adı: PLoS ONE
  • Derginin Tarandığı İndeksler: Science Citation Index Expanded (SCI-EXPANDED), Scopus, Academic Search Premier, Agricultural & Environmental Science Database, Animal Behavior Abstracts, Aquatic Science & Fisheries Abstracts (ASFA), BIOSIS, Biotechnology Research Abstracts, Chemical Abstracts Core, EMBASE, Food Science & Technology Abstracts, Index Islamicus, Linguistic Bibliography, MEDLINE, Pollution Abstracts, Psycinfo, zbMATH, Directory of Open Access Journals
  • İstanbul Medipol Üniversitesi Adresli: Evet

Özet

Entropy is an alternative measure to calculate the risk, simplify the portfolios and equity risk premium. It has higher explanatory power than capital asset price model (CAPM) beta. The comparison of Entropy and CAPM beta provide in depth analysis about the explanatory power of the model that in turn help investor to make right investment decisions that minimizes risk. In this context, this study aims to compare Shannon and Rennyi Entropies with the CAPM beta for measuring the risk. Ordinary Least square approach has been utilized using a dataset of 67 enterprises registered in Pakistan Stock exchange. The comparative analysis of CAPM beta and entropy has been carried out with the R2 parameters. The result indicates that entropy has more explanatory power as compare to CAPM beta’s explanatory power, and this turns out to be the best option to evaluate the risk performances. The result implies that an investor should make the best investment decision by choosing an enterprise that provide with good returns at minimum risk based on entropy technique.