Martingale transport with homogeneous stock movements
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Abstract: We study a variant of the martingale optimal transport problem in a multi-period setting to derive robust price bounds of a financial derivative. On top of marginal and martingale constraints, we introduce a time-homogeneity assumption, which restricts the variability of the forward-looking transitions of the martingale across time. We provide a dual formulation in terms of superhedging and discuss relaxations of the time-homogeneity assumption by adding market frictions. In financial terms, the introduced time-homogeneity corresponds to a time-consistency condition for call prices, given the state of the stock. The time homogeneity assumption leads to improved price bounds as market data from many time points can be incorporated effectively. The approach is illustrated with two numerical examples.
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Cites work
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Cited in
(10)- Robust bounds for derivative prices in Markovian models
- Model-free price bounds under dynamic option trading
- On the improvement of robust price bounds
- Tightening robust price bounds for exotic derivatives
- Change of numeraire in the two-marginals martingale transport problem
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- Improved robust price bounds for multi-asset derivatives under market-implied dependence information
- Computation of robust option prices via structured multimarginal martingale optimal transport
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