IDEAS home Printed from https://ideas.repec.org/a/taf/quantf/v4y2004i4p465-477.html
   My bibliography  Save this article

Preposterior analysis for option pricing

Author

Listed:
  • Dorje Brody
  • Ian Buckley
  • Bernhard Meister

Abstract

The second partial derivative of a European-style vanilla option with respect to the current price of the underlying asset—the option gamma—defines a probability density function for the current underlying price. By use of entropy maximization it is possible to obtain an option gamma, from which the associated option pricing formula can be recovered by integration. A number of pricing formulae are obtained in this manner, corresponding to different specifications of the constraints. When the available market information consists solely of a set of traded option prices, the entropic formulation leads to a model-independent calibration procedure. The result thus obtained also allows one to recover the relevant Greeks.

Suggested Citation

  • Dorje Brody & Ian Buckley & Bernhard Meister, 2004. "Preposterior analysis for option pricing," Quantitative Finance, Taylor & Francis Journals, vol. 4(4), pages 465-477.
    • Handle: RePEc:taf:quantf:v:4:y:2004:i:4:p:465-477
    DOI: 10.1080/14697680400008676
    as

    Download full text from publisher

    File URL: http://www.tandfonline.com/doi/abs/10.1080/14697680400008676
    Download Restriction: Access to full text is restricted to subscribers.
    File URL: https://libkey.io/10.1080/14697680400008676?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. C. Neri & L. Schneider, 2012. "The Impact of the Prior Density on a Minimum Relative Entropy Density: A Case Study with SPX Option Data," Papers 1201.2616, arXiv.org, revised Sep 2013.
    2. Cassio Neri & Lorenz Schneider, 2012. "Maximum entropy distributions inferred from option portfolios on an asset," Finance and Stochastics, Springer, vol. 16(2), pages 293-318, April.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:taf:quantf:v:4:y:2004:i:4:p:465-477. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Chris Longhurst (email available below). General contact details of provider: http://www.tandfonline.com/RQUF20 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.