Optimal transportation under controlled stochastic dynamics
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Abstract: We consider an extension of the Monge-Kantorovitch optimal transportation problem. The mass is transported along a continuous semimartingale, and the cost of transportation depends on the drift and the diffusion coefficients of the continuous semimartingale. The optimal transportation problem minimizes the cost among all continuous semimartingales with given initial and terminal distributions. Our first main result is an extension of the Kantorovitch duality to this context. We also suggest a finite-difference scheme combined with the gradient projection algorithm to approximate the dual value. We prove the convergence of the scheme, and we derive a rate of convergence. We finally provide an application in the context of financial mathematics, which originally motivated our extension of the Monge-Kantorovitch problem. Namely, we implement our scheme to approximate no-arbitrage bounds on the prices of exotic options given the implied volatility curve of some maturity.
The authors consider an extension of the Monge-Kantorovich mass transportation problem. The mass is transported by continuous semimartingales with given initial and terminal distributions. The cost of transportation depends on the drift and diffusion coefficients of the semimartingale. A duality result is stated extending previous work of \textit{T. Mikami} and \textit{M. Thieullen} [Stochastic Processes Appl. 116, No. 12, 1815--1835 (2006; Zbl 1118.93056)]. A numerical finite-difference scheme is proposed to approximate the dual value, and a convergence result is established. Finally, an application is given to approximate no-arbitrage bounds on the prices of exotic options given by the implied volatility curve of some maturity.
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