The minimum local cross-entropy criterion for inferring risk-neutral price distributions from traded options prices

Files in This Item:
File Description SizeFormat 
EDELMAN1.pdf71.75 kBAdobe PDFDownload
Title: The minimum local cross-entropy criterion for inferring risk-neutral price distributions from traded options prices
Authors: Edelman, David
Permanent link: http://hdl.handle.net/10197/1127
Date: 18-Apr-2004
Abstract: A quantity known as the Local Cross-Entropy (LCE) for a density is proposed, defined to be the local derivative of the Cross-Entropy between a density and a ’kernel-smoothed’ version of itself, with respect to bandwidth of the smoothing. This criterion is argued to be of the ’smoothness’ type and is also argued to be more sensible and ’natural’ than the frequently used ’Maximum Entropy’ criterion for many applications. When applied to price distributions in conjunction Options constraints the minimum LCE criterion is shown to produce estimates which share the best theoretical properties of the Maximum Entropy approach with the best practical properties of the estimators identified by Jackwerth and Rubinstein
Type of material: Working Paper
Publisher: University College Dublin. School of Business. Centre for Financial Markets
Copyright (published version): Centre for Financial Markets, 2004
Subject LCSH: Maximum entropy method
Options (Finance)--Mathematical models
Derivative securities--Mathematical models
Language: en
Status of Item: Not peer reviewed
Appears in Collections:Centre for Financial Markets Working Papers

Show full item record

Page view(s) 20

164
checked on May 25, 2018

Download(s) 20

228
checked on May 25, 2018

Google ScholarTM

Check


This item is available under the Attribution-NonCommercial-NoDerivs 3.0 Ireland. No item may be reproduced for commercial purposes. For other possible restrictions on use please refer to the publisher's URL where this is made available, or to notes contained in the item itself. Other terms may apply.