Multi-period Multi-criteria (MPMC) Valuation of American Options Based on Entropy Optimization Principles

The multi-period multi-nomial models have gained wider popularity in option pricing researches; however, there is still a need to focus researches on the efficacy of the effective criteria in determining the future values of the underlying assets. We, in this paper, employ probability distributions of the effective criteria in-price fluctuations. The Black-Scholes differential equation is used, and the EM algorithm is applied to estimate parameters of probability distributions. We employ entropy optimization measures to determine weights of each criterion in each period. Then, we carry out Monte Carlo simulations to access the initial option price. Finally, an illustrative example is given to verify the proposed approach.