Tightening Robust Price Bounds for Exotic Derivatives
27 Pages Posted: 16 Dec 2018
Date Written: November 26, 2018
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
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