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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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Formato: | Online Artículo Texto |
Lenguaje: | English |
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MDPI
2020
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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. |
format | Online Article Text |
id | pubmed-7517436 |
institution | National Center for Biotechnology Information |
language | English |
publishDate | 2020 |
publisher | MDPI |
record_format | MEDLINE/PubMed |
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 |
work_keys_str_mv | AT yuxisheng riskneutralityofrndandoptionpricingwithinanentropyframework |