The maximum maximum of a martingale with given n marginals

DOI10.1214/14-AAP1084MaRDI QIDQ259564zbMATH OpenOpenAlexFDO

Authors Pierre Henry-Labordère, Jan Obłój, Peter Spoida, Nizar Touzi

Publication date 11 March 2016

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

Full work available at URL https://arxiv.org/abs/1203.6877, https://projecteuclid.org/euclid.aoap/1452003233

zbMATH Keywords

martingalesoptimal controloptimal transportationhedginglookback optionmaximum processpathwise inequalitiesrobust pricingvolatility uncertainty

Mathematics Subject Classification ID

Derivative securities (option pricing, hedging, etc.) (91G20) Extreme value theory; extremal stochastic processes (60G70) Diffusion processes (60J60) Existence of optimal solutions to problems involving randomness (49J55) Martingales with continuous parameter (60G44) Financial applications of other theories (91G80) Optimal stochastic control (93E20)

Abstract: We obtain bounds on the distribution of the maximum of a martingale with fixed marginals at finitely many intermediate times. The bounds are sharp and attained by a solution to $n$-marginal Skorokhod embedding problem in Ob{l}'oj and Spoida [An iterated Az'ema-Yor type embedding for finitely many marginals (2013) Preprint]. It follows that their embedding maximizes the maximum among all other embeddings. Our motivating problem is superhedging lookback options under volatility uncertainty for an investor allowed to dynamically trade the underlying asset and statically trade European call options for all possible strikes and finitely-many maturities. We derive a pathwise inequality which induces the cheapest superhedging value, which extends the two-marginals pathwise inequality of Brown, Hobson and Rogers [Probab. Theory Related Fields 119 (2001) 558-578]. This inequality, proved by elementary arguments, is derived by following the stochastic control approach of Galichon, Henry-Labord`ere and Touzi [Ann. Appl. Probab. 24 (2014) 312-336].

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Cited in

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