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The relative entropy in CGMY processes and its applications to finance

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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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Authors and Affiliations

  1. Department of Mathematics, Sogang University, Seoul, 121-742, South Korea

    Young Shin Kim

  2. Courant Institute, 251 Mercer Street, New York, NY, 10012, USA

    Jeong Hyun Lee

Authors
  1. Young Shin Kim
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  2. Jeong Hyun Lee
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Correspondence to Young Shin Kim.

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Kim, Y.S., Lee, J.H. The relative entropy in CGMY processes and its applications to finance. Math Meth Oper Res 66, 327–338 (2007). https://doi.org/10.1007/s00186-006-0097-x

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  • DOI: https://doi.org/10.1007/s00186-006-0097-x

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