Get 20M+ Full-Text Papers For Less Than $1.50/day. Start a 14-Day Trial for You or Your Team.

Learn More →

On the Minimal Entropy Martingale Measure and Multinomial Lattices with Cumulants

On the Minimal Entropy Martingale Measure and Multinomial Lattices with Cumulants Abstract In this article, we describe with relevant examples based on empirical data how to use the minimal entropy martingale measure (MEMM) to price European and American Options in multinomial lattices which take into account cumulants information. For trinomial lattices, we show that minimal entropy prices are close to results obtained using the Black and Scholes option pricing formula. For pentanomial lattices, minimal entropy prices are close to results obtained under the mean-correcting martingale measure using the discrete Fourier transform. The MEMM is very easy to compute and is therefore a good candidate for option pricing in multinomial lattices. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Applied Mathematical Finance Taylor & Francis

On the Minimal Entropy Martingale Measure and Multinomial Lattices with Cumulants

Download PDF

On the Minimal Entropy Martingale Measure and Multinomial Lattices with Cumulants

Abstract

Abstract In this article, we describe with relevant examples based on empirical data how to use the minimal entropy martingale measure (MEMM) to price European and American Options in multinomial lattices which take into account cumulants information. For trinomial lattices, we show that minimal entropy prices are close to results obtained using the Black and Scholes option pricing formula. For pentanomial lattices, minimal entropy prices are close to results obtained under the...
Loading next page...
 
/lp/taylor-francis/on-the-minimal-entropy-martingale-measure-and-multinomial-lattices-js0CliR1V7
Publisher
Taylor & Francis
Copyright
Copyright Taylor & Francis Group, LLC
ISSN
1466-4313
eISSN
1350-486X
DOI
10.1080/1350486X.2012.714226
Publisher site
See Article on Publisher Site

Abstract

Abstract In this article, we describe with relevant examples based on empirical data how to use the minimal entropy martingale measure (MEMM) to price European and American Options in multinomial lattices which take into account cumulants information. For trinomial lattices, we show that minimal entropy prices are close to results obtained using the Black and Scholes option pricing formula. For pentanomial lattices, minimal entropy prices are close to results obtained under the mean-correcting martingale measure using the discrete Fourier transform. The MEMM is very easy to compute and is therefore a good candidate for option pricing in multinomial lattices.

Journal

Applied Mathematical Finance – Taylor & Francis

Published: Sep 1, 2013

Keywords: minimal entropy martingale measure; option pricing; multinomial lattices

There are no references for this article.