Pricing American Options Using a Nonparametric Entropy Approach
Joint Authors
Source
Discrete Dynamics in Nature and Society
Issue
Vol. 2014, Issue 2014 (31 Dec. 2014), pp.1-16, 16 p.
Publisher
Hindawi Publishing Corporation
Publication Date
2014-05-08
Country of Publication
Egypt
No. of Pages
16
Main Subjects
Abstract EN
This paper studies the pricing problem of American options using a nonparametric entropy approach.
First, we derive a general expression for recovering the risk-neutral moments of underlying asset return and then incorporate them into the maximum entropy framework as constraints.
Second, by solving this constrained entropy problem, we obtain a discrete risk-neutral (martingale) distribution as the unique pricing measure.
Third, the optimal exercise strategies are achieved via the least-squares Monte Carlo algorithm and consequently the pricing algorithm of American options is obtained.
Finally, we conduct the comparative analysis based on simulations and IBM option contracts.
The results demonstrate that this nonparametric entropy approach yields reasonably accurate prices for American options and produces smaller pricing errors compared to other competing methods.
American Psychological Association (APA)
Yu, Xisheng& Yang, Li. 2014. Pricing American Options Using a Nonparametric Entropy Approach. Discrete Dynamics in Nature and Society،Vol. 2014, no. 2014, pp.1-16.
https://search.emarefa.net/detail/BIM-466602
Modern Language Association (MLA)
Yu, Xisheng& Yang, Li. Pricing American Options Using a Nonparametric Entropy Approach. Discrete Dynamics in Nature and Society No. 2014 (2014), pp.1-16.
https://search.emarefa.net/detail/BIM-466602
American Medical Association (AMA)
Yu, Xisheng& Yang, Li. Pricing American Options Using a Nonparametric Entropy Approach. Discrete Dynamics in Nature and Society. 2014. Vol. 2014, no. 2014, pp.1-16.
https://search.emarefa.net/detail/BIM-466602
Data Type
Journal Articles
Language
English
Notes
Includes bibliographical references
Record ID
BIM-466602