Non-extensive minimal entropy martingale measures and semi-markov regime switching interest rate modeling
Faculty / School
Faculty of Computer Sciences (FCS)
Department of Mathematical Sciences
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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 . We formulate and solve the optimization problem of Hunt & Devolder for deriving risk-neutral densities using a new non-extensive entropy measure . We use the Lambert function and a new type of approach to obtain results without depending on stochastic calculus techniques.
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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