On the Minimal Entropy Martingale Measure and Multinomial Lattices with Cumulants

Autor:	Ivivi Joseph Mwaniki, Cyrus Seera Ssebugenyi, Virginie S. Konlack
Rok vydání:	2013
Předmět:	Computer Science::Computer Science and Game Theory Mathematical optimization Applied Mathematics Black–Scholes model Minimal-entropy martingale measure Valuation of options Local martingale Entropy (information theory) Applied mathematics Martingale difference sequence Multinomial distribution Finance Mathematics Martingale pricing
Zdroj:	Applied Mathematical Finance. 20:359-379
ISSN:	1466-4313 1350-486X
DOI:	10.1080/1350486x.2012.714226
Popis:	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.
Databáze:	OpenAIRE
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