Corpus ID: 152559102

Incorporating fat tails in financial models using entropic divergence measures

@article{Dey2012IncorporatingFT,
  title={Incorporating fat tails in financial models using entropic divergence measures},
  author={Santanu S. Dey and Sandeep Juneja},
  journal={arXiv: Statistical Finance},
  year={2012}
}
In the existing financial literature, entropy based ideas have been proposed in portfolio optimization, in model calibration for options pricing as well as in ascertaining a pricing measure in incomplete markets. The abstracted problem corresponds to finding a probability measure that minimizes the relative entropy (also called $I$-divergence) with respect to a known measure while it satisfies certain moment constraints on functions of underlying assets. In this paper, we show that under $I… Expand

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