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Path Dependent Optimal Transport and Model Calibration on Exotic Derivatives

Ivan Guo and Gregoire Loeper

Papers from arXiv.org

Abstract: In this paper, we introduce and develop the theory of semimartingale optimal transport in a path dependent setting. Instead of the classical constraints on marginal distributions, we consider a general framework of path dependent constraints. Duality results are established, representing the solution in terms of path dependent partial differential equations (PPDEs). Moreover we provide a localisation result, which reduces the dimensionality of the solution by identifying appropriate state variables based on the constraints and the cost function. Our technique is then applied to the exact calibration of volatility models to the prices of general path dependent derivatives.

Date: 2018-12
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