Microeconomic Theory and the Kullback-Liebler Discrepancy: Some Remarkable Connections
Abstract: Using a well-known utility of wealth function, the classic contingent claims model is shown to produce measures of expected wealth, certainty equivalence, gains from trade, and risk premia with relative entropy interpretations, as measured by the Kullback-Liebler discrepancy.
Keywords: Bayes factor; contingent claims; entropy; Pratt-Arrow risk