ROBUST BOUNDS FOR DERIVATIVE PRICES IN MARKOVIAN MODELS

Julian Sester ()
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Julian Sester: Department of Quantitative Finance, Institute for Economics, University of Freiburg, Platz der Alten Synagoge 1, 79098 Freiburg, Germany

International Journal of Theoretical and Applied Finance (IJTAF), 2020, vol. 23, issue 03, 1-39

Abstract: We study the optimal martingale transport problem under an additional constraint imposing the underlying process to be Markovian. This formulation results in a modified transportation problem in which the solutions correspond to robust price bounds for exotic derivatives within the class of calibrated martingale models exhibiting the Markov property. We investigate the arising consequences which comprise a dual perspective of the transport problem in terms of liquid replication strategies. Eventually an empirical investigation illustrates the influence of the Markov property on robust price bounds for financial derivatives.

Keywords: Martingale optimal transport; robust pricing; Markov property; duality (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (7)

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DOI: 10.1142/S0219024920500156

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