Subjective OHMC

Mix Optimal Hedge Monte Carlo with Bayesian Statistics

The Optimal Hedge Monte Carlo algorithm (@potters2001) gives an interesting way to price options based on fitting an optimal hedge based on a functional space. Though the authors use an ‘objective’ (i.e. frequentist) distribution, it is agnostic to the distribution used to draw from. A Bayesian time-series can be used by drawing from the posterior predictive density using the same objective function used.

This gives an options price for any type of option even with early exercise abilities based on the individual mental models of different agents.