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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. (KAR id:57952)


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: Divisions > Kent Business School - Division > Department of Accounting and Finance
Depositing User: Radu Tunaru
Date Deposited: 19 Oct 2016 10:10 UTC
Last Modified: 10 Dec 2022 02:36 UTC
Resource URI: (The current URI for this page, for reference purposes)

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