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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