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Probability distributions of assets inferred from option prices via the Principle of Maximum Entropy

Borwein, Jonathan M. and Choksi, Rustum and Marechal, Pierre (2003) Probability distributions of assets inferred from option prices via the Principle of Maximum Entropy. SIAM J. Optimization, 4 . pp. 464-478.

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      Abstract

      This article revisits the maximum entropy algorithm in the context of recovering the probability distribution of an asset from the prices of finitely many associated European call options, via partially finite convex programming. We are able to provide an effective characterization of the constraint qualification under which the problem reduces to optimizing an explicit function in finitely many variables. We also prove that the value (or objective) function is lower semi-continuous on its domain. Reference is given to a web-site which exploits these ideas for the efficient computation of the maximum entropy solution.

      Item Type: Article
      Additional Information: pubdom FALSE
      Uncontrolled Keywords: European options, maximum entropy, semidefinite programming, Lagrangian duality, convex conjugate
      Subjects: 49-xx Calculus of variations and optimal control; optimization
      Faculty: UNSPECIFIED
      Depositing User: Users 1 not found.
      Date Deposited: 27 Oct 2003
      Last Modified: 12 Jan 2015 15:26
      URI: https://docserver.carma.newcastle.edu.au/id/eprint/10

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