This study explores the effectiveness of entropy as a proxy of aggregate market risk, in explaining the cross-section of excess returns in asset pricing model, after controlling for established factors like market excess returns, size, book to market and momentum. The analysis considers Indian firms, given that Indian capital markets are characterized by relatively thin trading and higher volatility compared to developed markets. Entropy is estimated using Shannon Entropy. Factor mimicking portfolio is constructed based on Shannon Entropy, whose returns are used as additional risk factor in Fama–French–Carhart four factor asset pricing model. Gibbons Ross Shanken-F statistic and Adjusted R² are used to judge the efficacy of this factor in capital asset pricing model. All analysis is done using built in functions of python. Market beta, size and Book-to-Market are found to impact equity returns significantly. Entropy factor also impacts equity returns, but to a lesser extent. Explanatory power of asset pricing model is found to improve after inclusion of entropy factor, as indicated by GRS-F Statistic and Adjusted R². Entropy augmented Capital Asset Pricing Models can be used by firms to decide hurdle rate for project evaluation and by asset managers for identifying over-valued/under-valued securities. This is the first study that investigates the role of entropy in explaining asset returns, in addition to other established priced factors. This study is limited to Shannon Entropy only. Other forms of entropy may improve results further, and should be explored in future research.

本研究在控制了市场超额收益、规模、账面市值比和动量等既定因素后，探讨了熵作为总体市场风险代理指标的有效性，解释了资产定价模型中超额收益的横截面。该分析考虑了印度公司，因为与发达市场相比，印度资本市场的特点是交易相对清淡且波动性较高。使用香农熵估计熵。Factor mimicking portfolio是基于Shannon Entropy构建的，其收益作为Fama-French-Carhart四因子资产定价模型中的附加风险因子。Gibbons Ross Shanken-F 统计和调整后的 R ²用于判断该因素在资本资产定价模型中的有效性。所有分析都是使用 python 的内置函数完成的。研究发现，市场贝塔系数、规模和账面市值比会显着影响股票回报率。熵因子也会影响股票回报，但影响较小。^{如 GRS-F 统计量和 Adjusted R 2}所示，资产定价模型的解释力在包含熵因子后有所提高. 公司可以使用熵增资本资产定价模型来确定项目评估的门槛率，资产管理者可以使用它来识别估值过高/估值过低的证券。这是第一项调查熵在解释资产回报以及其他既定定价因素中的作用的研究。本研究仅限于香农熵。其他形式的熵可能会进一步改善结果，应在未来的研究中进行探索。