Martingale optimal transport and robust hedging in continuous time (Q466902)
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English | Martingale optimal transport and robust hedging in continuous time |
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Martingale optimal transport and robust hedging in continuous time (English)
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31 October 2014
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The authors prove the duality between the robust hedging of path dependent European options and the martingale optimal transport problem. The authors consider a financial market, which consists of a saving account normalized to unity \(B_t\equiv 1\) and of a risky asset \(S_t,\;t\in [0,T]\), where \(T<\infty\) is the maturity date and \(S_t\) is only assumed to be a continuous function of time. The hedging problem is to construct a minimal super-hedging portfolio that consists of dynamically trading the underlying risky asset and a static position of vanilla options which can be expressed at the given fixed maturity. The dual is a Monge-Kantorovich type martingale transport problem of maximizing the expected value of the option over all martingale measures, that have a given marginal at maturity. The authors present also a family of piecewise constant super-replication portfolios that asymptotically achieve the minimal super-replication cost.
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European options
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robust hedging
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min-max theorems
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Prokhorov metric
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optimal transport
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