Expensive Martingales

Buehler, Hans

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Expensive Martingales

Quantitative Finance, Vol. 6, No. 3, June 2006

25 Pages Posted: 7 Jun 2008

See all articles by Hans Buehler

Hans Buehler

XTX Markets

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Abstract

We characterize strictly arbitrage-free markets of European options where only a discrete set of options is traded. We then construct martingales which reprice all given options and which are most expensive among all martingales with this property.

We also present algorithms to adjust real life market data and to construct expensive martingales while taking into account additional weak information: Estimated prices of more exotic products such as, for example, forward started options.

Keywords: Marginals, Martingale, Transition Probability, Balayage, Linear Programming, Discrete Pricing, Measures, Forward Started Options, European Options

JEL Classification: C60

Suggested Citation: Suggested Citation

Buehler, Hans, Expensive Martingales. Quantitative Finance, Vol. 6, No. 3, June 2006, Available at SSRN: https://ssrn.com/abstract=1118246