Computation of Robust Option Prices via Structured Multi-Marginal Martingale Optimal Transport

Linn Engstr\"om, Sigrid K\"allblad and Johan Karlsson

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Abstract: We introduce an efficient computational framework for solving a class of multi-marginal martingale optimal transport problems, which includes many robust pricing problems of large financial interest. Such problems are typically computationally challenging due to the martingale constraint, however, by extending the state space we can identify them with problems that exhibit a certain sequential martingale structure. Our method exploits such structures in combination with entropic regularisation, enabling fast computation of optimal solutions and allowing us to solve problems with a large number of marginals. We demonstrate the method by using it for computing robust price bounds for different options, such as lookback options and Asian options.

Date: 2024-06, Revised 2025-03
New Economics Papers: this item is included in nep-cmp
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