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The relative entropy in CGMY processes and its applications to finance
Authors:Young Shin Kim  Jeong Hyun Lee
Institution:(1) Department of Mathematics, Sogang University, Seoul, 121-742, South Korea;(2) Courant Institute, 251 Mercer Street, New York, NY 10012, USA
Abstract:The CGMY market model generates infinite equivalent martingale measures (EMM). In order to price options, we need an adequate method to choose one EMM. This paper presents the relative entropy for CGMY processes, and apply it to choosing an EMM called the model preserving minimal entropy martingale measure.
Keywords:Incomplete market  CGMY process  Relative entropy  Esscher transform  Minimal entropy martingale measure
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