Pathwise inequalities for local time: Applications to Skorokhod embeddings and optimal stopping

DOI10.1214/07-AAP507MaRDI QIDQ957523zbMATH OpenOpenAlexFDO

Authors Jan Obłój, Alexander Matthew Gordon Cox, David Hobson

Publication date 27 November 2008

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

Full work available at URL https://arxiv.org/abs/math/0702173

zbMATH Keywords

local timeoptimal stoppingstochastic differential equationsSkorokhod embedding problemrobust pricing and hedgingvallois stopping time

Mathematics Subject Classification ID

Stopping times; optimal stopping problems; gambling theory (60G40) Martingales with continuous parameter (60G44)

Abstract: We develop a class of pathwise inequalities of the form $H(B_t)ge{M}_t+F(L_t)$, where $B_t$ is Brownian motion, $L_t$ its local time at zero and $M_t$ a local martingale. The concrete nature of the representation makes the inequality useful for a variety of applications. In this work, we use the inequalities to derive constructions and optimality results of Vallois' Skorokhod embeddings. We discuss their financial interpretation in the context of robust pricing and hedging of options written on the local time. In the final part of the paper we use the inequalities to solve a class of optimal stopping problems of the form $$. The solution is given via a minimal solution to a system of differential equations and thus resembles the maximality principle described by Peskir. Throughout, the emphasis is placed on the novelty and simplicity of the techniques.

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Cited in

(30)

• Model-Independent Bounds for Asian Options: A Dynamic Programming Approach
• Supermartingale Brenier's theorem with full-marginals constraint
• The maximum maximum of a martingale with given \(n\) marginals
• Processes that can be embedded in a geometric Brownian motion
• Martingale optimal transport and robust hedging in continuous time
• Robust pricing and hedging of double no-touch options
• From optimal stopping boundaries to Rost's reversed barriers and the Skorokhod embedding
• The root solution to the multi-marginal embedding problem: an optimal stopping and time-reversal approach
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• Quickest detection of a hidden target and extremal surfaces
• Some results on Skorokhod embedding and robust hedging with local time
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• On the monotonicity principle of optimal Skorokhod embedding problem
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• Root's barrier: construction, optimality and applications to variance options
• On an explicit Skorokhod embedding for spectrally negative Lévy processes
• Stopping with expectation constraints: 3 points suffice
• Three-dimensional Brownian motion and the golden ratio rule
• A stochastic control approach to no-arbitrage bounds given marginals, with an application to lookback options
• Martingale Inequalities, Optimal Martingale Transport, and Robust Superhedging
• A capped optimal stopping problem for the maximum process
• A model-free version of the fundamental theorem of asset pricing and the super-replication theorem
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• Watermark options
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• Robust hedging of options on a leveraged exchange traded fund

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