The relative entropy in CGMY processes and its applications to finance

Young Shin Kim; Jeong Hyun Lee

doi:10.1007/s00186-006-0097-x

The relative entropy in CGMY processes and its applications to finance

Young Shin Kim
, Jeong Hyun Lee

Dean's Office, College of Business

Stony Brook University

New York University

Research output: Contribution to journal › Article › peer-review

18 Scopus citations

Abstract

The CGMY market model generates infinite equivalent martingale measures (EMM). In order to price options, we need an adequate method to choose one EMM. This paper presents the relative entropy for CGMY processes, and apply it to choosing an EMM called the model preserving minimal entropy martingale measure.

Original language	English
Pages (from-to)	327-338
Number of pages	12
Journal	Mathematical Methods of Operations Research
Volume	66
Issue number	2
DOIs	https://doi.org/10.1007/s00186-006-0097-x
State	Published - Oct 2007

Keywords

CGMY process
Esscher transform
Incomplete market
Minimal entropy martingale measure
Relative entropy

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title = "The relative entropy in CGMY processes and its applications to finance",

abstract = "The CGMY market model generates infinite equivalent martingale measures (EMM). In order to price options, we need an adequate method to choose one EMM. This paper presents the relative entropy for CGMY processes, and apply it to choosing an EMM called the model preserving minimal entropy martingale measure.",

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AU - Kim, Young Shin

AU - Lee, Jeong Hyun

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AB - The CGMY market model generates infinite equivalent martingale measures (EMM). In order to price options, we need an adequate method to choose one EMM. This paper presents the relative entropy for CGMY processes, and apply it to choosing an EMM called the model preserving minimal entropy martingale measure.

KW - CGMY process

KW - Esscher transform

KW - Incomplete market

KW - Minimal entropy martingale measure

KW - Relative entropy

UR - https://www.scopus.com/pages/publications/34848831577

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DO - 10.1007/s00186-006-0097-x

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JO - Mathematical Methods of Operations Research

JF - Mathematical Methods of Operations Research

IS - 2

ER -

The relative entropy in CGMY processes and its applications to finance

Abstract

Keywords

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