Robust Bounds for Derivative Prices in Markovian Models

28 Pages Posted: 19 Dec 2018 Last revised: 29 Feb 2020

See all articles by Julian Sester

Julian Sester

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

Date Written: December 6, 2018

Abstract

We study the optimal martingale transport problem under an additional constraint imposing the underlying process to be Markovian. This formulation results in a modified transportation problem in which the solutions correspond to robust price bounds for exotic derivatives within the class of calibrated martingale models exhibiting the Markov property. We investigate the arising consequences which comprise a dual perspective of the transport problem in terms of liquid replication strategies. Eventually an empirical investigation illustrates the influence of the Markov property on robust price bounds for financial derivatives.

Keywords: Optimal Martingale Transport, Robust Pricing, Markov Property, Duality

JEL Classification: C61, G13

Suggested Citation

Sester, Julian, Robust Bounds for Derivative Prices in Markovian Models (December 6, 2018). Available at SSRN: https://ssrn.com/abstract=3297018 or http://dx.doi.org/10.2139/ssrn.3297018

Julian Sester (Contact Author)

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

S3 B2-A28 Nanyang Avenue
Singapore, 639798
Singapore

University of Freiburg

Freiburg, D-79085
Germany

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