Maximum entropy distributions inferred from option portfolios on an asset

Cassio Neri and Lorenz Schneider
Additional contact information
Cassio Neri: EM - EMLyon Business School

Post-Print from HAL

Abstract: We obtain the maximum entropy distribution for an asset from call and digital option prices. A rigorous mathematical proof of its existence and exponential form is given, which can also be applied to legitimise a formal derivation by Buchen and Kelly (J. Financ. Quant. Anal. 31:143–159, 1996). We give a simple and robust algorithm for our method and compare our results to theirs. We present numerical results which show that our approach implies very realistic volatility surfaces even when calibrating only to at-the-money options. Finally, we apply our approach to options on the S&P 500 index.

Date: 2011-12-01
References: Add references at CitEc
Citations:

Published in Finance and Stochastics, 2011, 16 (2), pp.293-318 P

There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-02312676

Access Statistics for this paper

More papers in Post-Print from HAL
Bibliographic data for series maintained by CCSD ().