Non-extensive minimal entropy martingale measures and semi-markov regime switching interest rate modeling

Author(s)

Muhammad Sheraz, Institute of Business Administration, KarachiFollow
Vasile Preda, Universitatea din Bucuresti
Silvia Dedu, Bucharest University of Economic Studies

Author Affiliation

Muhammad Sheraz is Assistant Professor of Mathematical Sciences and Economics & Finance at Institute of Business Administration (IBA), Karachi

Faculty / School

Faculty of Computer Sciences (FCS)

Department

Department of Mathematical Sciences

Was this content written or created while at IBA?

Yes

Document Type

Article

Source Publication

AIMS Mathematics

ISSN

2473-6988

Keywords

Entropy, Interest rate models, Minimal entropy martingale, Risk neutral density, Semi-Markov processes

Disciplines

Mathematics

Abstract

A minimal entropy martingale measure problem is studied to investigate risk-neutral densities and interest rate modelling. Hunt & Devolder focused on the method of Shannon minimal entropy martingale measure to select the best measure among all the equivalent martingale measures and, proposed a generalization of the Ho & Lee model in the semi-Markov regime-switching framework [1]. We formulate and solve the optimization problem of Hunt & Devolder for deriving risk-neutral densities using a new non-extensive entropy measure [2]. We use the Lambert function and a new type of approach to obtain results without depending on stochastic calculus techniques.

Indexing Information

HJRS - X Category, Scopus, Web of Science - Science Citation Index Expanded (SCI)

Journal Quality Ranking

Impact Factor: 1.427

Recommended Citation

Sheraz, M., Preda, V., & Dedu, S. (2020). Non-extensive minimal entropy martingale measures and semi-markov regime switching interest rate modeling. AIMS Mathematics, 5 (1), 300-310. Retrieved from https://ir.iba.edu.pk/faculty-research-articles/166

Publication Status

Published