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Maxentropic construction of risk neutral measures: discrete market models

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  • Henryk Gzyl

Abstract

The maximum entropy principle provides a variational method to select a measure yielding pre-assigned mean values to a random variable. It can also be invoked to construct measures that render a stochastic process a martingale, thus providing a systematic way of constructing risk-neutral measures and thus closing a market. We carry out this programme for discrete market models. On the one hand these are amenable to numerical implementation and on the other, they provide a stepping stone for more general market models in continuous time.

Suggested Citation

  • Henryk Gzyl, 2000. "Maxentropic construction of risk neutral measures: discrete market models," Applied Mathematical Finance, Taylor & Francis Journals, vol. 7(4), pages 229-239.
    • Handle: RePEc:taf:apmtfi:v:7:y:2000:i:4:p:229-239
    DOI: 10.1080/13504860110061699
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    References listed on IDEAS

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