Geometric Lévy Process Pricing Model
We consider models for stock prices which relates to random processes with independent homogeneous increments (Levy processes). These models are arbitrage free but correspond to the incomplete financial market. There are many different approaches for pricing of financial derivatives. We consider here mainly the approach which is based on minimal relative entropy. This method is related to an utility function of exponential type and the Esscher transformation of probabilistic measures.
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- Merton, Robert C., 1976.
"Option pricing when underlying stock returns are discontinuous,"
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