An explicit martingale version of the one-dimensional Brenier theorem

Pierre Henry-Labordère () and Nizar Touzi ()
Additional contact information
Pierre Henry-Labordère: Société Générale
Nizar Touzi: Ecole Polytechnique Paris

Finance and Stochastics, 2016, vol. 20, issue 3, No 3, 635-668

Abstract: Abstract By investigating model-independent bounds for exotic options in financial mathematics, a martingale version of the Monge–Kantorovich mass transport problem was introduced in (Beiglböck et al. in Finance Stoch. 17:477–501, 2013; Galichon et al. in Ann. Appl. Probab. 24:312–336, 2014). Further, by suitable adaptation of the notion of cyclical monotonicity, Beiglböck and Juillet (Ann. Probab. 44:42–106, 2016) obtained an extension of the one-dimensional Brenier theorem to the present martingale version. In this paper, we complement the previous work by extending the so-called Spence–Mirrlees condition to the case of martingale optimal transport. Under some technical conditions on the starting and the target measures, we provide an explicit characterization of the corresponding optimal martingale transference plans both for the lower and upper bounds. These explicit extremal probability measures coincide with the unique left- and right-monotone martingale transference plans introduced in (Beiglböck and Juillet in Ann. Probab. 44:42–106, 2016). Our approach relies on the (weak) duality result stated in (Beiglböck et al. in Finance Stoch. 17:477–501, 2013), and provides as a by-product an explicit expression for the corresponding optimal semi-static hedging strategies. We finally provide an extension to the multiple marginals case.

Keywords: Model-independent pricing; Martingale optimal transport problem; Robust superreplication theorem; 91G20; 91G80 (search for similar items in EconPapers)
JEL-codes: G12 G13 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (31)

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DOI: 10.1007/s00780-016-0299-x

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