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Computational exploration of the biological basis of Black-Scholes expected utility function

Bhattacharya, Sukanto and Kumar, Kuldeep 2007, Computational exploration of the biological basis of Black-Scholes expected utility function, Journal of applied mathematics and decision sciences, vol. 2007, no. Article ID 39460, pp. 1-15.

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Title Computational exploration of the biological basis of Black-Scholes expected utility function
Author(s) Bhattacharya, Sukanto
Kumar, Kuldeep
Journal name Journal of applied mathematics and decision sciences
Volume number 2007
Issue number Article ID 39460
Start page 1
End page 15
Publisher Hindawi Publishing Corp.
Place of publication New York, N. Y.
Publication date 2007
ISSN 1173-9126
1532-7612
Summary It 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.
Language eng
Field of Research 019999 Mathematical Sciences not elsewhere classified
Socio Economic Objective 970101 Expanding Knowledge in the Mathematical Sciences
HERDC Research category C1.1 Refereed article in a scholarly journal
Copyright notice ©2007, Hindawi Publishing Corp.
Persistent URL http://hdl.handle.net/10536/DRO/DU:30035231

Document type: Journal Article
Collection: Deakin Graduate School of Business
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