BAYESIAN INFERENCE, PRIOR INFORMATION ON VOLATILITY, AND OPTION PRICING: A MAXIMUM ENTROPY APPROACH

Francisco Venegas-Martínez

International Journal of Theoretical and Applied Finance (IJTAF), 2005, vol. 08, issue 01, 1-12

Abstract: This paper develops a Bayesian model for pricing derivative securities with prior information on volatility. Prior information is given in terms of expected values of levels and rates of precision: the inverse of variance. We provide several approximate formulas, for valuing European call options, on the basis of asymptotic and polynomial approximations of Bessel functions.

Keywords: Bayesian Inference; option pricing; stochastic volatility; numerical methods (search for similar items in EconPapers)
Date: 2005
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DOI: 10.1142/S0219024905002755

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