Download or read book Maximum Entropy Distributions Inferred from Option Portfolios on an Asset written by Cassio Neri and published by . This book was released on 2014 with total page 23 pages. Available in PDF, EPUB and Kindle. Book excerpt: We obtain the maximum entropy distribution for an asset from call and digital option prices. A rigorous mathematical proof of its existence and exponential form is given, which can also be applied to legitimise a formal derivation by Buchen and Kelly (JFQA 31:143-159, 1996). We give a simple and robust algorithm for our method and compare our results to theirs. We present numerical results which show that our approach implies very realistic volatility surfaces even when calibrating only to at-the-money options. Finally, we apply our approach to options on the S&P 500 index.