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Risk-Neutrality of RND and Option Pricing within an Entropy Framework

This article constructs an entropy pricing framework by incorporating a set of informative risk-neutral moments (RNMs) extracted from the market-available options as constraints. Within the RNM-constrained entropic framework, a unique distribution close enough to the correct one is obtained, and its...

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Detalles Bibliográficos
Autor principal: Yu, Xisheng
Formato: Online Artículo Texto
Lenguaje:English
Publicado: MDPI 2020
Materias:
Acceso en línea:https://www.ncbi.nlm.nih.gov/pmc/articles/PMC7517436/
https://www.ncbi.nlm.nih.gov/pubmed/33286607
http://dx.doi.org/10.3390/e22080836
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author Yu, Xisheng
author_facet Yu, Xisheng
author_sort Yu, Xisheng
collection PubMed
description This article constructs an entropy pricing framework by incorporating a set of informative risk-neutral moments (RNMs) extracted from the market-available options as constraints. Within the RNM-constrained entropic framework, a unique distribution close enough to the correct one is obtained, and its risk-neutrality is deeply verified based on simulations. Using this resultant risk-neutral distribution (RND), a sample of risk-neutral paths of the underlying price is generated and ultimately the European option’s prices are computed. The pricing performance and analysis in simulations demonstrate that this proposed valuation is comparable to the benchmarks and can produce fairly accurate prices for options.
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spelling pubmed-75174362020-11-09 Risk-Neutrality of RND and Option Pricing within an Entropy Framework Yu, Xisheng Entropy (Basel) Article This article constructs an entropy pricing framework by incorporating a set of informative risk-neutral moments (RNMs) extracted from the market-available options as constraints. Within the RNM-constrained entropic framework, a unique distribution close enough to the correct one is obtained, and its risk-neutrality is deeply verified based on simulations. Using this resultant risk-neutral distribution (RND), a sample of risk-neutral paths of the underlying price is generated and ultimately the European option’s prices are computed. The pricing performance and analysis in simulations demonstrate that this proposed valuation is comparable to the benchmarks and can produce fairly accurate prices for options. MDPI 2020-07-30 /pmc/articles/PMC7517436/ /pubmed/33286607 http://dx.doi.org/10.3390/e22080836 Text en © 2020 by the author. Licensee MDPI, Basel, Switzerland. This article is an open access article distributed under the terms and conditions of the Creative Commons Attribution (CC BY) license (http://creativecommons.org/licenses/by/4.0/).
spellingShingle Article
Yu, Xisheng
Risk-Neutrality of RND and Option Pricing within an Entropy Framework
title Risk-Neutrality of RND and Option Pricing within an Entropy Framework
title_full Risk-Neutrality of RND and Option Pricing within an Entropy Framework
title_fullStr Risk-Neutrality of RND and Option Pricing within an Entropy Framework
title_full_unstemmed Risk-Neutrality of RND and Option Pricing within an Entropy Framework
title_short Risk-Neutrality of RND and Option Pricing within an Entropy Framework
title_sort risk-neutrality of rnd and option pricing within an entropy framework
topic Article
url https://www.ncbi.nlm.nih.gov/pmc/articles/PMC7517436/
https://www.ncbi.nlm.nih.gov/pubmed/33286607
http://dx.doi.org/10.3390/e22080836
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