Simple Entropic Derivation of a Generalized Black-Scholes Option Pricing Model

Abstract

Abstract: A straightforward derivation of the celebrated Black-Scholes Option Pricing model is obtained by solution of a simple constrained minimization of relative entropy. The derivation leads to a natural generalization of it, which is consistent with some evidence from stock index option markets.

Keywords

• option pricing
• entropic martingale measure
• Black-Scholes
• asset pricing