Entropy Concepts Applied to Option Pricing

Tunaru, Radu (2016) Entropy Concepts Applied to Option Pricing. Annals of the University of Craiova, Mathematics and Computer Science Series, 43 (1). pp. 108-117. ISSN 1223-6934. E-ISSN 2246-9958.

Abstract

Uncertainty is one of the most important concept in financial mathematics applications. In this paper we review some important aspects related to the application of entropy-related concepts to option pricing. The Kullback-Leibler information divergence and the informational energy introduced by Onicescu are the main tools investigated in this paper. We highlight a necessary condition that must be verified when obtaining the probability distribution minimising the Kullback-Leibler information divergence. Deriving a probability distribution by optimising the information energy has some pitfalls that are discussed in this paper.

Item Type:	Article
Uncontrolled keywords:	Kullback-Leibler divergence measure, informational energy, option pricing, optimisation
Subjects:	H Social Sciences > HA Statistics > HA33 Management Science H Social Sciences > HG Finance Q Science > QA Mathematics (inc Computing science) > QA273 Probabilities
Divisions:	Faculties > Social Sciences > Kent Business School > Accounting and Finance
Depositing User:	Radu Tunaru
Date Deposited:	19 Oct 2016 10:10 UTC
Last Modified:	29 May 2019 18:01 UTC
Resource URI:	https://kar.kent.ac.uk/id/eprint/57952 (The current URI for this page, for reference purposes)
Tunaru, Radu:	https://orcid.org/0000-0002-5623-9876