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THE RELATIVE ENTROPY UNDER THE R-CGMY PROCESSES

  • Kwon, YongHoon (Department of Mathematics Pohang University of Science and Technology) ;
  • Lee, Younhee (Department of Mathematics Chungnam National University)
  • Received : 2014.10.20
  • Accepted : 2015.01.12
  • Published : 2015.02.15

Abstract

We consider the relative entropy for two R-CGMY processes, which are CGMY processes with Y equal to 1, to choose an equivalent martingale measure (EMM) when the underlying asset of a derivative follows a R-CGMY process in the financial market. Since the R-CGMY process leads to an incomplete market, we have to use a proper technique to choose an EMM among a variety of EMMs. In this paper, we derive the closed form expression of the relative entropy for R-CGMY processes.

Acknowledgement

Supported by : Chungnam National University

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