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Pricing Interval European Option with the Principle of Maximum Entropy

1
School of Banking and Finance, University of International Business and Economics, Beijing 100029, China
2
School of Management, China University of Mining and Technology (Beijing), Beijing 100083, China
*
Author to whom correspondence should be addressed.
Entropy 2019, 21(8), 788; https://doi.org/10.3390/e21080788
Received: 25 June 2019 / Revised: 2 August 2019 / Accepted: 9 August 2019 / Published: 13 August 2019
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Abstract

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. View Full-Text
Keywords: principle of maximum entropy; interval number; interval European option; option pricing principle of maximum entropy; interval number; interval European option; option pricing
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Liu, X.; Zhou, R.; Xiong, Y.; Yang, Y. Pricing Interval European Option with the Principle of Maximum Entropy. Entropy 2019, 21, 788.

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