Pricing Interval European Option with the Principle of Maximum Entropy

Entropy

Xiao Liu¹  Yahui Xiong¹  Rongxi Zhou¹  Yuexiang Yang² 

[1] School of Banking and Finance, University of International Business and Economics, Beijing 100029, China;School of Management, China University of Mining and Technology (Beijing), Beijing 100083, China;

关键词: principle of maximum entropy;    interval number;    interval European option;    option pricing;   

DOI  :  10.3390/e21080788

来源: DOAJ

【 摘 要 】

This paper develops the interval maximum entropy model for the interval European option valuation by estimating an underlying asset distribution. The refined solution for the model is obtained by the Lagrange multiplier. The particle swarm optimization algorithm is applied to calculate the density function of the underlying asset, which can be utilized to price the Shanghai Stock Exchange (SSE) 50 Exchange Trades Funds (ETF) option of China and the Boeing stock option of the United States. Results show that maximum entropy distribution provides precise estimations for the underlying asset of interval number situations. In this way, we can get the distribution of the underlying assets and apply it to the interval European option pricing in the financial market.

【 授权许可】

Unknown