Martingale optimal transport in the discrete case via simple linear programming techniques

DOI10.1007/S00186-019-00684-8MaRDI QIDQ2283306zbMATH OpenOpenAlexWikidataFDO

Authors Nicole Bäuerle, Daniel Schmithals

Publication date 30 December 2019

Published in Mathematical Methods of Operations Research (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/1902.02503

zbMATH Keywords

linear programmingconvex ordermartingale optimal transportleft-monotone transport plan

Mathematics Subject Classification ID

Derivative securities (option pricing, hedging, etc.) (91G20) Variational problems in a geometric measure-theoretic setting (49Q20) Martingales with discrete parameter (60G42)

Abstract: We consider the problem of finding consistent upper price bounds and super replication strategies for exotic options, given the observation of call prices in the market. This field of research is called model-independent finance and has been introduced by Hobson 1998. Here we use the link to mass transport problems. In contrast to existing literature we assume that the marginal distributions at the two time points we consider are discrete probability distributions. This has the advantage that the optimization problems reduce to linear programs and can be solved rather easily when assuming a general martingale Spence Mirrlees condition. We will prove the optimality of left-monotone transport plans under this assumption and provide an algorithm for its construction. Our proofs are simple and do not require much knowledge of probability theory. At the end we present an example to illustrate our approach.

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Cited in

(9)

• Discrete Optimal Transport with Independent Marginals is #P-Hard
• Complete duality for martingale optimal transport on the line
• An optimal transport problem with backward martingale constraints motivated by insider trading
• Martingale transport with homogeneous stock movements
• On intermediate marginals in martingale optimal transportation
• An explicit martingale version of the one-dimensional Brenier theorem
• Computational methods for martingale optimal transport problems
• Consistent upper price bounds for exotic options
• Structure of optimal martingale transport plans in general dimensions

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