Tightening Robust Price Bounds for Exotic Derivatives

27 Pages Posted: 16 Dec 2018

See all articles by Eva Luetkebohmert

Eva Luetkebohmert

University of Freiburg, Institute for Economic Research; University of Freiburg - Institute for Economic Research

Julian Sester

University of Freiburg; Nanyang Technological University (NTU) - School of Physical and Mathematical Sciences

Date Written: November 26, 2018

Abstract

We investigate the optimal martingale transport problem under additional constraints and its application to robust price bounds for financial derivatives. More specifically, we derive improved price bounds by taking into account supplementary information about the variance of the returns on the underlying security. Such information can be extracted from market data and our theoretical and numerical results indeed show a significant tightening of price bounds. In this respect, our results have important implications for the practical applicability and relevance of robust price bounds.

Keywords: robust price bounds, model-independent valuation, optimal martingale transport, additional market information

JEL Classification: G13, G11, C61

Suggested Citation

Luetkebohmert, Eva and Luetkebohmert, Eva and Sester, Julian and Sester, Julian, Tightening Robust Price Bounds for Exotic Derivatives (November 26, 2018). Available at SSRN: https://ssrn.com/abstract=3290503 or http://dx.doi.org/10.2139/ssrn.3290503

Eva Luetkebohmert

University of Freiburg, Institute for Economic Research ( email )

Platz der Alten Synagoge 1
Freiburg, D-79098
Germany

University of Freiburg - Institute for Economic Research ( email )

Freiberg
Germany

Julian Sester (Contact Author)

University of Freiburg

Freiburg, D-79085
Germany

Nanyang Technological University (NTU) - School of Physical and Mathematical Sciences ( email )

S3 B2-A28 Nanyang Avenue
Singapore, 639798
Singapore

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