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

DOI10.1214/07-AAP507zbMATH Open1165.60020arXivmath/0702173OpenAlexW3105471026MaRDI QIDQ957523FDOQ957523

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)

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.

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

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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)

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Cited In (30)

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• Optimal Skorokhod embedding under finitely many marginal constraints
• On the monotonicity principle of optimal Skorokhod embedding problem
• \(\pi \) options
• Embedding of Walsh Brownian motion
• An explicit martingale version of the one-dimensional Brenier theorem
• Martingale inequalities for the maximum via pathwise arguments
• 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
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• Tightness and duality of martingale transport on the Skorokhod space
• Robust hedging of options on a leveraged exchange traded fund
• Supermartingale Brenier's theorem with full-marginals constraint

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