A Note on Conditional Arbitrage-Free Maximum Entropy Densities For Simulative Option Pricing

In this note we present a simple method to include the no-arbitrage condition into thederivation of conditional densities using the principle of maximum entropy. For the case ofidentically and independently distributed returns, we easily derive that the whole processestimated that way is arbitrage free. Such processes may be directly used for simulativederivation of option prices.

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Year of publication:	2009-06-24
Authors:	Herrmann, Klaus
Institutions:	Universität <Erlangen
Subject:	Arbitrage \| Optionspreistheorie \| Simulation \| simulation \| Entropie <Informationstheorie> \| entropy

Table of Contents
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1 Introduction
2 Maximum Entropy Models for Assets Returns
3 Arbitrage Free Processes
4 Simulative Option Prices for the DAX30
5 Summary
References

Persistent link: https://www.econbiz.de/10005866785