Computational exploration of the biological basis of Black-Scholes expected utility functionJournal of applied mathematics and decision sciences
Date of this Version1-1-2007
Document TypeJournal Article
AbstractIt has often been argued that there exists an underlying biological basis of utility functions. Taking this line of argument a step further in this paper, we have aimed to computationally demonstrate the biological basis of the Black-Scholes functional form as applied to classical option pricing and hedging theory. The evolutionary optimality of the classical Black-Scholes function has been computationally established by means of a haploid genetic algorithm model. The objective was to minimize the dynamic hedging error for a portfolio of assets that is built to replicate the payoff from a European multi-asset option. The functional form that is seen to evolve over successive generations which best attains this optimization objective is the classical Black-Scholes function extended to a multiasset scenario.
Citation InformationSukanto Bhattacharya and Kuldeep Kumar. "Computational exploration of the biological basis of Black-Scholes expected utility function" Journal of applied mathematics and decision sciences Vol. 2007 Iss. ID 39460 (2007) p. 15p
Available at: http://works.bepress.com/kuldeep_kumar/29/