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- W2168225868 abstract "We study weak convergence of a sequence of (approximating) asset price models S n to a limiting model S: both S n and S are multi-dimensional asset price processes with some physical probability measures P n resp. P, and a natural notion of process convergence is the weak convergence of the induced path probability measures, denoted by (S n |P n ) resp. (S|P), on the abstract topological space of possible asset price trajectories. For the purpose of no-arbitrage pricing of options or more general derivatives on the model assets, there are two different aspects of this convergence: (i) convergence under the given physical probability measures, (S n |P n ) → (S|P) and (ii) convergence under suitably chosen equivalent martingale measures (EMM) relevant for pricing derivatives, (S n |Q n ) → (S|Q). A simple example is the convergence of a sequence of discrete-time binomial models to the Black–Scholes model (geometric Brownian motion), where the model markets are complete and hence the choice of Q n resp. Q is unique. This example and the general case of complete limit markets (S|P) have been studied in [1]. In contrast we have several choices for Q n resp. Q when all the model markets are incomplete. A natural choice is the minimum entropy EMM [2, 3], defined as the (unique) EMM R minimizing the relative entropy H(R|P) to the physical measure P, among all EMMs. We prove the following: given that the approximating models converge under the physical measures, (S n |P n ) → (S|P) — with some mild assumptions on P and on the minimum entropy EMMs R n for S n resp. R for S — entropy number convergence implies weak convergence of the minimum entropy option price processes: H(R n |P n ) → H(R|P) implies (S n |R n ) → (S|R). Several rigorous examples illustrate the result; cf. also [4]." @default.
- W2168225868 created "2016-06-24" @default.
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- W2168225868 date "2000-07-01" @default.
- W2168225868 modified "2023-09-27" @default.
- W2168225868 title "CONVERGENCE OF MINIMUM ENTROPY OPTION PRICES FOR WEAKLY CONVERGING INCOMPLETE MARKET MODELS" @default.
- W2168225868 cites W2062911733 @default.
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- W2168225868 doi "https://doi.org/10.1142/s0219024900000577" @default.
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