On the entropy minimal martingale measure in the exponential Ornstein-Uhlenbeck stochastic volatility model

TL;DR

This paper derives the entropy-minimal equivalent martingale measure for a stochastic volatility model where the asset price depends on the exponential of an Ornstein-Uhlenbeck process, providing insights into risk-neutral valuation.

Contribution

It introduces a method to explicitly compute the entropy-minimal martingale measure in an exponential Ornstein-Uhlenbeck stochastic volatility model.

Findings

Explicit formula for the entropy-minimal martingale measure

Enhanced understanding of measure change in exponential Ornstein-Uhlenbeck models

Potential applications in option pricing and risk management

Abstract

We consider a stochastic volatility model where the price evolution depend on the exponential of the Ornstein--Uhlenbeck process. After a brief revision of the related theory the entropy-minimal equivalent martingale measure. is calculated.