Minimal-entropy martingale measure

In probability theory, the minimal-entropy martingale measure (MEMM) is the risk-neutral probability measure that minimises the entropy difference between the objective probability measure, P {\displaystyle P} , and the risk-neutral measure, Q {\displaystyle Q} . In incomplete markets, this is one way of choosing a risk-neutral measure (from the infinite number available) so as to still maintain the no-arbitrage conditions.

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Minimal-entropy martingale measure

In probability theory, the minimal-entropy martingale measure (MEMM) is the risk-neutral probability measure that minimises the entropy difference between the objective probability measure, P {\displaystyle P} , and the risk-neutral measure, Q {\displaystyle Q} . In incomplete markets, this is one way of choosing a risk-neutral measure (from the infinite number available) so as to still maintain the no-arbitrage conditions.

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Source: Wikipedia "Minimal-entropy martingale measure" · CC BY-SA 4.0

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