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An Explicit Martingale Version of Brenier's Theorem

Author

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  • Pierre Henry-Labordere

    () (SOCIETE GENERALE - Equity Derivatives Research Societe Generale - Société Générale)

  • Nizar Touzi

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

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 \cite{BeiglbockHenry LaborderePenkner,GalichonHenry-LabordereTouzi}. In this paper, we extend the one-dimensional Brenier's theorem to the present martingale version. We provide the explicit martingale optimal transference plans for a remarkable class of coupling functions corresponding to the lower and upper bounds. These explicit extremal probability measures coincide with the unique left and right monotone martingale transference plans, which were introduced in \cite{BeiglbockJuillet} by suitable adaptation of the notion of cyclic monotonicity. Instead, our approach relies heavily on the (weak) duality result stated in \cite{BeiglbockHenry-LaborderePenkner}, 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.

Suggested Citation

  • Pierre Henry-Labordere & Nizar Touzi, 2013. "An Explicit Martingale Version of Brenier's Theorem," Working Papers hal-00790001, HAL.
  • Handle: RePEc:hal:wpaper:hal-00790001
    Note: View the original document on HAL open archive server: https://hal.archives-ouvertes.fr/hal-00790001v3
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    References listed on IDEAS

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    1. J. Jacod & A.N. Shiryaev, 1998. "Local martingales and the fundamental asset pricing theorems in the discrete-time case," Finance and Stochastics, Springer, vol. 2(3), pages 259-273.
    2. B. Acciaio & M. Beiglbock & F. Penkner & W. Schachermayer & J. Temme, 2012. "A trajectorial interpretation of Doob's martingale inequalities," Papers 1202.0447, arXiv.org, revised Jul 2013.
    3. A. M. G. Cox & David Hobson & Jan Ob{l}'oj, 2007. "Pathwise inequalities for local time: Applications to Skorokhod embeddings and optimal stopping," Papers math/0702173, arXiv.org, revised Nov 2008.
    4. David G. Hobson, 1998. "Robust hedging of the lookback option," Finance and Stochastics, Springer, vol. 2(4), pages 329-347.
    5. 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.
    6. Cousot, Laurent, 2007. "Conditions on option prices for absence of arbitrage and exact calibration," Journal of Banking & Finance, Elsevier, vol. 31(11), pages 3377-3397, November.
    7. Beatrice Acciaio & Mathias Beiglbock & Friedrich Penkner & Walter Schachermayer, 2013. "A model-free version of the fundamental theorem of asset pricing and the super-replication theorem," Papers 1301.5568, arXiv.org, revised Mar 2013.
    8. Haydyn Brown & David Hobson & L. C. G. Rogers, 2001. "Robust Hedging of Barrier Options," Mathematical Finance, Wiley Blackwell, vol. 11(3), pages 285-314.
    9. repec:dau:papers:123456789/1448 is not listed on IDEAS
    10. Peter Laurence & Tai-Ho Wang, 2005. "Sharp Upper and Lower Bounds for Basket Options," Applied Mathematical Finance, Taylor & Francis Journals, vol. 12(3), pages 253-282.
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    Citations

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    Cited by:

    1. Bruno Bouchard & Marcel Nutz, 2013. "Arbitrage and duality in nondominated discrete-time models," Papers 1305.6008, arXiv.org, revised Mar 2015.
    2. Florian Stebegg, 2014. "Model-Independent Pricing of Asian Options via Optimal Martingale Transport," Papers 1412.1429, arXiv.org.
    3. Mathias Beiglbock & Marcel Nutz & Nizar Touzi, 2015. "Complete Duality for Martingale Optimal Transport on the Line," Papers 1507.00671, arXiv.org, revised Jun 2016.
    4. David Hobson & Martin Klimmek, 2015. "Robust price bounds for the forward starting straddle," Finance and Stochastics, Springer, vol. 19(1), pages 189-214, January.
    5. Gaoyue Guo & Xiaolu Tan & Nizar Touzi, 2015. "Optimal Skorokhod embedding under finitely-many marginal constraints," Papers 1506.04063, arXiv.org, revised Aug 2016.

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