Title

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

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

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

Publication Status

Published

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