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A note on conditional arbitrage-free maximum entropy densities for simulative option pricing

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  • Herrmann, Klaus

Abstract

In this note we present a simple method to include the no-arbitrage condition into the derivation of conditional densities using the principle of maximum entropy. For the case of identically and independently distributed returns, we easily derive that the whole process estimated that way is arbitrage free. Such a process may be directly used for simulative derivation of option prices.

Suggested Citation

  • Herrmann, Klaus, 2009. "A note on conditional arbitrage-free maximum entropy densities for simulative option pricing," Discussion Papers 85/2009, Friedrich-Alexander University Erlangen-Nuremberg, Chair of Statistics and Econometrics.
    • Handle: RePEc:zbw:faucse:852009
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