INFORMATION THEORETIC MEASURES FOR ASSESSING FINANCIAL MARKETS

Abstract

We have derived the Black-Scholes differential equation of the quanto option which gives the price of a European option when underlying financial assets price

follows a geometric Brownian motion. Also by integrating the risk-neutral infor- mation measure, we have derived the risk-neutral probability density functions

of multi-assets price, as the solution of minimizing Kullback relative entropy. We

have applied Laplace transform homotopy perturbation method for the approxi- mate analytical solution of the desired Black-Scholes equation where time deriva- tive is assumed as a Liouville-Caputo time-fractional derivative. Numerical results

for the assumed parameters demonstrate that the method is effective and this approach will help to study the financial behavior of the quanto option pricing problems.