Martingale Benamou-Brenier: a probabilistic perspective

DOI10.1214/20-AOP1422MaRDI QIDQ2212593zbMATH OpenOpenAlexFDO

Publication date 24 November 2020

Published in The Annals of Probability (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/1708.04869, https://projecteuclid.org/euclid.aop/1600826471

Benamou-Brenier Brenier's theorem causal transport cyclical monotonicity Knothe Rosenblatt coupling martingales optimal transport Schrödinger problem weak transport problems

Mathematics Subject Classification ID

Martingales with discrete parameter (60G42) Martingales with continuous parameter (60G44) Derivative securities (option pricing, hedging, etc.) (91G20)

Abstract: In classical optimal transport, the contributions of Benamou-Brenier and McCann regarding the time-dependent version of the problem are cornerstones of the field and form the basis for a variety of applications in other mathematical areas. We suggest a Benamou-Brenier type formulation of the martingale transport problem for given

d

-dimensional distributions

m u, u

in convex order. The unique solution

M^{*} = (M_{t}^{*})_{t i n [0, 1]}

of this problem turns out to be a Markov-martingale which has several notable properties: In a specific sense it mimics the movement of a Brownian particle as closely as possible subject to the conditions

M_{0}^{*} s i m m u, M_{1}^{*} s i m u

. Similar to McCann's displacement-interpolation,

M^{*}

provides a time-consistent interpolation between

m u

and

u

. For particular choices of the initial and terminal law,

M^{*}

recovers archetypical martingales such as Brownian motion, geometric Brownian motion, and the Bass martingale. Furthermore, it yields a natural approximation to the local vol model and a new approach to Kellerer's theorem. This article is parallel to the work of Huesmann-Trevisan, who consider a related class of problems from a PDE-oriented perspective.

Review text

A Benamou-Brenier type formulation of the martingale transport problem is given for given \(d\)-dimensional distributions \(\mu\) and \(\nu\) in convex order. The unique solution \(M^{*}\) of this problem is a Markov-martingale which has several notable properties. Similarly to McCann's displacement-interpolation, \(M^{*}\) provides a time-consistent interpolation between \(\mu\) and \(\nu\). In special cases, \(M^{*}\) recovers archetypical martingales such as Brownian motion, geometric Brownian motion, and the Bass martingale.

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