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Maximum entropy distributions inferred from option portfolios on an asset

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  • Cassio Neri
  • Lorenz Schneider

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  • Cassio Neri & Lorenz Schneider, 2012. "Maximum entropy distributions inferred from option portfolios on an asset," Finance and Stochastics, Springer, vol. 16(2), pages 293-318, April.
    • Handle: RePEc:spr:finsto:v:16:y:2012:i:2:p:293-318
    DOI: 10.1007/s00780-011-0167-7
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    References listed on IDEAS

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    1. Buchen, Peter W. & Kelly, Michael, 1996. "The Maximum Entropy Distribution of an Asset Inferred from Option Prices," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 31(1), pages 143-159, March.
    2. Les Gulko, 2002. "The Entropy Theory Of Bond Option Pricing," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 5(04), pages 355-383.
    3. Joshua Coval & Jakub Jurek & Erik Stafford, 2009. "The Economics of Structured Finance," Journal of Economic Perspectives, American Economic Association, vol. 23(1), pages 3-25, Winter.
    4. Les Gulko, 1999. "The Entropic Market Hypothesis," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 2(03), pages 293-329.
    5. Michael A. H. Dempster & Elena A. Medova & Seung W. Yang, 2007. "Empirical Copulas For Cdo Tranche Pricing Using Relative Entropy," World Scientific Book Chapters, in: Alexander Lipton & Andrew Rennie (ed.), Credit Correlation Life After Copulas, chapter 5, pages 87-109, World Scientific Publishing Co. Pte. Ltd..
    6. Breeden, Douglas T & Litzenberger, Robert H, 1978. "Prices of State-contingent Claims Implicit in Option Prices," The Journal of Business, University of Chicago Press, vol. 51(4), pages 621-651, October.
    7. Michael A. H. Dempster & Elena A. Medova & Seung W. Yang, 2007. "Empirical Copulas For Cdo Tranche Pricing Using Relative Entropy," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 10(04), pages 679-701.
    8. Marco Avellaneda & Craig Friedman & Richard Holmes & Dominick Samperi, 1997. "Calibrating volatility surfaces via relative-entropy minimization," Applied Mathematical Finance, Taylor & Francis Journals, vol. 4(1), pages 37-64.
    9. Marco Frittelli, 2000. "The Minimal Entropy Martingale Measure and the Valuation Problem in Incomplete Markets," Mathematical Finance, Wiley Blackwell, vol. 10(1), pages 39-52, January.
    10. Michael A. H. Dempster & Elena A. Medova & Seung W. Yang, 2007. "Erratum: "Empirical Copulas For Cdo Tranche Pricing Using Relative Entropy"," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 10(07), pages 1255-1260.
    11. Dorje Brody & Ian Buckley & Bernhard Meister, 2004. "Preposterior analysis for option pricing," Quantitative Finance, Taylor & Francis Journals, vol. 4(4), pages 465-477.
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    Citations

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    Cited by:

    1. Omid M. Ardakani, 2022. "Option pricing with maximum entropy densities: The inclusion of higher‐order moments," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 42(10), pages 1821-1836, October.
    2. Sylvia Gottschalk, 2016. "Entropy and credit risk in highly correlated markets," Papers 1604.07042, arXiv.org.
    3. Park, Sangjin & Jang, Kwahngsoo & Yang, Jae-Suk, 2021. "Information flow between bitcoin and other financial assets," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 566(C).
    4. José L. Vilar-Zanón & Olivia Peraita-Ezcurra, 2019. "A linear goal programming method to recover risk neutral probabilities from options prices by maximum entropy," Decisions in Economics and Finance, Springer;Associazione per la Matematica, vol. 42(1), pages 259-276, June.
    5. Cassio Neri & Lorenz Schneider, 2012. "A Note on "A Family of Maximum Entropy Densities Matching Call Option Prices"," Papers 1212.4279, arXiv.org.
    6. Christopher Bose & Rua Murray, 2014. "Maximum Entropy Estimates for Risk-Neutral Probability Measures with Non-Strictly-Convex Data," Journal of Optimization Theory and Applications, Springer, vol. 161(1), pages 285-307, April.
    7. Malhotra, Gifty & Srivastava, R. & Taneja, H.C., 2019. "Calibration of the risk-neutral density function by maximization of a two-parameter entropy," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 513(C), pages 45-54.
    8. Marcos Escobar & Christoph Gschnaidtner, 2018. "A multivariate stochastic volatility model with applications in the foreign exchange market," Review of Derivatives Research, Springer, vol. 21(1), pages 1-43, April.
    9. Gottschalk, Sylvia, 2017. "Entropy measure of credit risk in highly correlated markets," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 478(C), pages 11-19.
    10. Vilsmeier, Johannes, 2014. "Updating the option implied probability of default methodology," Discussion Papers 43/2014, Deutsche Bundesbank.
    11. Salazar Celis, Oliver & Liang, Lingzhi & Lemmens, Damiaan & Tempère, Jacques & Cuyt, Annie, 2015. "Determining and benchmarking risk neutral distributions implied from option prices," Applied Mathematics and Computation, Elsevier, vol. 258(C), pages 372-387.

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    More about this item

    Keywords

    Entropy; Information theory; I-divergence; Asset distribution; Option pricing; Volatility smile; 91B24; 91B28; 91B70; 94A17; C16; C63; G13;
    All these keywords.

    JEL classification:

    • C16 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Econometric and Statistical Methods; Specific Distributions
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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