The relative entropy in CGMY processes and its applications to finance (Q2472193)

It is assumed that the stock price process follows an exponential CGW process (named after a paper due to \textit{P. Carr}, \textit{H. Geman}, \textit{D. Madan} and \textit{M. Yor} [J. Business 75, 305--332 (2002)]). The CGMY market model generates infinitely many equivalent martingale measures (EMM). In order to price options, an adequate method to chose a particular EMM is required. The authors introduce the closed form of the relative entropy between two CGMY processes. The minimal entropy EMM introduced by \textit{T. Fujiwara} and \textit{T. Miyahara} [Finance Stoch. 7, No. 4, 509--531 (2003; Zbl 1035.60040)] has the drawback that the stock process may no longer be an exponential CGMY process under the minimal entropy EMM. The authors find the EMM which has the minimal entropy w.r.t. the market measure, while the stock process follows the exponential CM process under the EMM (being called the model preserving minimal entropy EMM). Finally, the model preserving minimal entropy EMM is compared with the Escher EMM and the minimal entropy EMM.