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Maximum Maximum of Martingales given Marginals

Listed author(s):
  • Pierre Henry-Labordere

    (Société Générale - Société Générale)

  • Jan Obloj


    (MI - Mathematical Institute [Oxford] - University of Oxford [Oxford])

  • Peter Spoida


    (MI - Mathematical Institute [Oxford] - University of Oxford [Oxford])

  • Nizar Touzi


    (CMAP - Centre de Mathématiques Appliquées - Ecole Polytechnique - Polytechnique - X - CNRS - Centre National de la Recherche Scientifique)

Registered author(s):

    We consider the problem of superhedging under volatility uncertainty for an investor allowed to dynamically trade the underlying asset and statically trade European call options for all possible strikes and finitely-many maturities. We present a general duality result which converts this problem into a min-max calculus of variations problem where the Lagrange multipliers correspond to the static part of the hedge. Following Galichon, Henry-Labordére and Touzi \cite{ght}, we apply stochastic control methods to solve it explicitly for Lookback options with a non-decreasing payoff function. The first step of our solution recovers the extended optimal properties of the Azéma-Yor solution of the Skorokhod embedding problem obtained by Hobson and Klimmek \cite{hobson-klimmek} (under slightly different conditions). The two marginal case corresponds to the work of Brown, Hobson and Rogers \cite{brownhobsonrogers}. The robust superhedging cost is complemented by (simple) dynamic trading and leads to a class of semi-static trading strategies. The superhedging property then reduces to a functional inequality which we verify independently. The optimality follows from existence of a model which achieves equality which is obtained in Ob\lój and Spoida \cite{OblSp}.

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    Paper provided by HAL in its series Working Papers with number hal-00684005.

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    Date of creation: 07 Apr 2013
    Publication status: Published in 2013
    Handle: RePEc:hal:wpaper:hal-00684005
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    1. David G. Hobson, 1998. "Robust hedging of the lookback option," Finance and Stochastics, Springer, vol. 2(4), pages 329-347.
    2. Breeden, Douglas T & Litzenberger, Robert H, 1978. "Prices of State-contingent Claims Implicit in Option Prices," The Journal of Business, University of Chicago Press, vol. 51(4), pages 621-651, October.
    3. Alexander Cox & Jan Obłój, 2011. "Robust pricing and hedging of double no-touch options," Finance and Stochastics, Springer, vol. 15(3), pages 573-605, September.
    4. Mathias Beiglb\"ock & Pierre Henry-Labord\`ere & Friedrich Penkner, 2011. "Model-independent Bounds for Option Prices: A Mass Transport Approach," Papers 1106.5929,, revised Feb 2013.
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