dorsal/arxiv
View SchemaGeometry of Financial Markets -- Towards Information Theory Model of Markets
| Authors | Edward W. Piotrowski, Jan Sladkowski |
|---|---|
| Categories | |
| ArXiv ID | physics/0607236 |
| URL | https://arxiv.org/abs/physics/0607236 |
| DOI | 10.1016/j.physa.2007.02.020 |
Abstract
Most of parameters used to describe states and dynamics of financial market depend on proportions of the appropriate variables rather than on their actual values. Therefore, projective geometry seems to be the correct language to describe the theater of financial activities. We suppose that the object of interest of agents, called here baskets, form a vector space over the reals. A portfolio is defined as an equivalence class of baskets containing assets in the same proportions. Therefore portfolios form a projective space. Cross ratios, being invariants of projective maps, form key structures in the proposed model. Quotation with respect to an asset X (i.e. in units of X) are given by linear maps. Among various types of metrics that have financial interpretation, the min-max metrics on the space of quotations can be introduced. This metrics has an interesting interpretation in terms of rates of return. It can be generalized so that to incorporate a new numerical parameter (called temperature) that describes agent's lack of knowledge about the state of the market. In a dual way, a metrics on the space of market quotation is defined. In addition, one can define an interesting metric structure on the space of portfolios/quotation that is invariant with respect to hyperbolic (Lorentz) symmetries of the space of portfolios. The introduced formalism opens new interesting and possibly fruitful fields of research.
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"abstract": "Most of parameters used to describe states and dynamics of financial market\ndepend on proportions of the appropriate variables rather than on their actual\nvalues. Therefore, projective geometry seems to be the correct language to\ndescribe the theater of financial activities. We suppose that the object of\ninterest of agents, called here baskets, form a vector space over the reals. A\nportfolio is defined as an equivalence class of baskets containing assets in\nthe same proportions. Therefore portfolios form a projective space. Cross\nratios, being invariants of projective maps, form key structures in the\nproposed model. Quotation with respect to an asset X (i.e. in units of X) are\ngiven by linear maps. Among various types of metrics that have financial\ninterpretation, the min-max metrics on the space of quotations can be\nintroduced. This metrics has an interesting interpretation in terms of rates of\nreturn. It can be generalized so that to incorporate a new numerical parameter\n(called temperature) that describes agent\u0027s lack of knowledge about the state\nof the market. In a dual way, a metrics on the space of market quotation is\ndefined. In addition, one can define an interesting metric structure on the\nspace of portfolios/quotation that is invariant with respect to hyperbolic\n(Lorentz) symmetries of the space of portfolios. The introduced formalism opens\nnew interesting and possibly fruitful fields of research.",
"arxiv_id": "physics/0607236",
"authors": [
"Edward W. Piotrowski",
"Jan Sladkowski"
],
"categories": [
"physics.soc-ph",
"q-fin.PM"
],
"doi": "10.1016/j.physa.2007.02.020",
"title": "Geometry of Financial Markets -- Towards Information Theory Model of Markets",
"url": "https://arxiv.org/abs/physics/0607236"
},
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