Geodesic
The minimum-entropy algorithm and related methods for calibrating asset-pricing models
Documenta mathematica, ICM Berlin 1998, Vol. III (1998), pp. 545-563.

Voir la notice de l'article provenant de la source Electronic Library of Mathematics

We describe an algorithm for calibrating asset-pricing models based on minimizing the relative entropy between probabilities. The algorithm determines a probability measure on path-space which minimizes the Kullback information with respect to a given prior and satisfies a finite number of moment constraints which correspond to fitting prices. It admits, generically, a unique, stable, solution that depends smoothly on the input prices. We study the sensitivities of the model values of contingent claims to variations in the input prices. We find that hedge ratios can be interpreted as "risk-neutral" regression coefficients of the contingent claim's payoff on the set of payoffs of the input instruments. We also show that the minimum-entropy algorithm is a special case of a general class of algorithms for calibrating asset-pricing models based on stochastic control and convex optimization. As an illustration, we use minimum-entropy to construct a smooth curve of instantaneous forward rates from US LIBOR data and to study the corresponding sensitivities of fixed-income securities to variations in input prices.
Classification : 91B24, 90C90, 60G35, 62P20
Keywords: asset-pricing, minimum-entropy algorithm 
@article{DOCMA_1998__S9__a25,
     author = {Avellaneda, Marco},
     title = {The minimum-entropy algorithm and related methods for calibrating asset-pricing models},
     journal = {Documenta mathematica},
     pages = {545--563},
     publisher = {mathdoc},
     volume = {ICM Berlin 1998, Vol. III},
     year = {1998},
     language = {en},
     url = {http://geodesic.mathdoc.fr/item/DOCMA_1998__S9__a25/}
}
TY  - JOUR
AU  - Avellaneda, Marco
TI  - The minimum-entropy algorithm and related methods for calibrating asset-pricing models
JO  - Documenta mathematica
PY  - 1998
SP  - 545
EP  - 563
VL  - ICM Berlin 1998, Vol. III
PB  - mathdoc
UR  - http://geodesic.mathdoc.fr/item/DOCMA_1998__S9__a25/
LA  - en
ID  - DOCMA_1998__S9__a25
ER  - 
%0 Journal Article
%A Avellaneda, Marco
%T The minimum-entropy algorithm and related methods for calibrating asset-pricing models
%J Documenta mathematica
%D 1998
%P 545-563
%V ICM Berlin 1998, Vol. III
%I mathdoc
%U http://geodesic.mathdoc.fr/item/DOCMA_1998__S9__a25/
%G en
%F DOCMA_1998__S9__a25
Avellaneda, Marco. The minimum-entropy algorithm and related methods for calibrating asset-pricing models. Documenta mathematica, ICM Berlin 1998, Vol. III (1998), pp. 545-563. http://geodesic.mathdoc.fr/item/DOCMA_1998__S9__a25/