Entropy 2000, 2[2], 70-77
Entropy
ISSN 1099-4300
http://www.mdpi.org/entropy/
Simple Entropic Derivation of a Generalized Black-Scholes Option Pricing Model

Michael J. Stutzer

Dept. of Finance, 108 PBAB, Univ. of Iowa, Iowa City, IA., USA.
E-mail: [email protected]

Received: 19 January 2000 / Accepted: 24 March 2000 / Published: 4 April 2000

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.

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