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On risk measures, market making, and exponential families

On risk measures, market making, and exponential families On Risk Measures, Market Making, and Exponential Families JACOB D. ABERNETHY University of Michigan and RAFAEL M. FRONGILLO Harvard University and SINDHU KUTTY University of Michigan In this note we elaborate on an emerging connection between three areas of research: (a) the concept of a risk measure developed within financial mathematics for reasoning about risk attitudes of agents under uncertainty, (b) the design of automated market makers for prediction markets, and (c) the family of probability distributions known as exponential families. Categories and Subject Descriptors: J.4 [Social and Behavioral Sciences]: Economics; I.2.6 [Artificial Intelligence]: Learning General Terms: Economics, Theory Additional Key Words and Phrases: exponential family; entropic risk measure; exponential utility 1. INTRODUCING RISK MEASURES Imagine that a farmer must decide between several crops to plant for the upcoming growing season. The cost of each crop is different and the yield of each crop depends differently on weather conditions; one may be better suited for cold temperatures, another for heavy rainfall, and yet another for drought. The farmer's profits for the harvest will thus be determined not only by the cost of the seeds and planting, but also by the suitability of the chosen crops for the actual http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png ACM SIGecom Exchanges Association for Computing Machinery

On risk measures, market making, and exponential families

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References (16)

Publisher
Association for Computing Machinery
Copyright
Copyright © 2015 by ACM Inc.
ISSN
1551-9031
DOI
10.1145/2728732.2728734
Publisher site
See Article on Publisher Site

Abstract

On Risk Measures, Market Making, and Exponential Families JACOB D. ABERNETHY University of Michigan and RAFAEL M. FRONGILLO Harvard University and SINDHU KUTTY University of Michigan In this note we elaborate on an emerging connection between three areas of research: (a) the concept of a risk measure developed within financial mathematics for reasoning about risk attitudes of agents under uncertainty, (b) the design of automated market makers for prediction markets, and (c) the family of probability distributions known as exponential families. Categories and Subject Descriptors: J.4 [Social and Behavioral Sciences]: Economics; I.2.6 [Artificial Intelligence]: Learning General Terms: Economics, Theory Additional Key Words and Phrases: exponential family; entropic risk measure; exponential utility 1. INTRODUCING RISK MEASURES Imagine that a farmer must decide between several crops to plant for the upcoming growing season. The cost of each crop is different and the yield of each crop depends differently on weather conditions; one may be better suited for cold temperatures, another for heavy rainfall, and yet another for drought. The farmer's profits for the harvest will thus be determined not only by the cost of the seeds and planting, but also by the suitability of the chosen crops for the actual

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ACM SIGecom Exchanges – Association for Computing Machinery

Published: Jan 28, 2015

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