Market Consistency and WMC [26]

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Bullet points include: Usually we seek weights which are “as similar as possible” to being equally weighted whilst still satisfying the relevant calibration criteria. As similar as possible usually defined by seeking to minimise relative entropy, i.e. minimise where the q_i are the original weights (here typically 1/N) and the p_i are the new weights. Calibrations usually expressed as modelled value needs to match observed value, i.e., say for the j'th calibrating instrument. The p_i then typically take the form: p_i for some suitable lambda_j where the z_ji are the present values of the payoff on instrument j in the i'th simulation. K is chosen so that.

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