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Tightening robust price bounds for exotic derivatives

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  • Eva Lütkebohmert
  • Julian Sester

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.

Suggested Citation

  • Eva Lütkebohmert & Julian Sester, 2019. "Tightening robust price bounds for exotic derivatives," Quantitative Finance, Taylor & Francis Journals, vol. 19(11), pages 1797-1815, November.
    • Handle: RePEc:taf:quantf:v:19:y:2019:i:11:p:1797-1815
    DOI: 10.1080/14697688.2019.1603394
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    Cited by:

    1. Eva Lutkebohmert & Thorsten Schmidt & Julian Sester, 2021. "Robust deep hedging," Papers 2106.10024, arXiv.org, revised Nov 2021.
    2. Ariel Neufeld & Antonis Papapantoleon & Qikun Xiang, 2023. "Model-Free Bounds for Multi-Asset Options Using Option-Implied Information and Their Exact Computation," Management Science, INFORMS, vol. 69(4), pages 2051-2068, April.
    3. Jonathan Ansari & Eva Lutkebohmert & Ariel Neufeld & Julian Sester, 2022. "Improved Robust Price Bounds for Multi-Asset Derivatives under Market-Implied Dependence Information," Papers 2204.01071, arXiv.org, revised Sep 2023.
    4. Ariel Neufeld & Antonis Papapantoleon & Qikun Xiang, 2020. "Model-free bounds for multi-asset options using option-implied information and their exact computation," Papers 2006.14288, arXiv.org, revised Jan 2022.
    5. Stephan Eckstein & Michael Kupper, 2019. "Martingale transport with homogeneous stock movements," Papers 1908.10242, arXiv.org, revised May 2021.
    6. Ariel Neufeld & Julian Sester, 2021. "Model-free price bounds under dynamic option trading," Papers 2101.01024, arXiv.org, revised Jul 2021.
    7. Ariel Neufeld & Julian Sester, 2021. "A deep learning approach to data-driven model-free pricing and to martingale optimal transport," Papers 2103.11435, arXiv.org, revised Dec 2022.

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