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 the derivation of conditional densities using the principle of maximum entropy. For the case of identically and independently distributed returns, we easily derive that the whole process estimated that way is arbitrage free. Such a process may be directly used for simulative derivation of option prices.

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Year of publication:	2009
Authors:	Herrmann, Klaus
Institutions:	Wirtschafts- und Sozialwissenschaftliche Fakultät, Friedrich-Alexander-Universität Erlangen-Nürnberg
Subject:	Maximum Entropy density \| No Arbitrage Condition

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Extent:	application/pdf
Series:	Discussion Papers.
Type of publication:	Book / Working Paper
Language:	English
Notes:	Number 85/2009
Source:	RePEc - Research Papers in Economics

Persistent link: https://www.econbiz.de/10008493545