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; affiliation not provided to SSRN

Julian Sester

National University of Singapore (NUS); affiliation not provided to SSRN

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 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 )

Rempartstr. 16
Freiburg, D-79098
Germany

affiliation not provided to SSRN

Julian Sester (Contact Author)

National University of Singapore (NUS) ( email )

1E Kent Ridge Road
NUHS Tower Block Level 7
Singapore, 119228
Singapore

affiliation not provided to SSRN

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