F INANCE R ESEARCH S EMINAR S UPPORTED BY U NIGESTION " A stochastic control approach to no - arbitrage bounds given marginals , with an application to Lookback options

We consider the problem of superhedging under volatility uncertainty for an investor allowed to dynamically trade the underlying asset, and statically trade European call options for all possible strikes with some given maturity. This problem is classically approached by means of the Skorohod Embedding Problem (SEP). Instead, we provide a dual formulation which converts the superhedging problem into a continuous martingale optimal transportation problem. We then show that this formulation allows to recover previously known results about Lookback options. In particular, our methodology induces a new proof of the optimality of Azema-Yor solution of the SEP for a certain class of Lookback options. Unlike the SEP technique, our approach applies to a large class of exotics and is suitable for numerical approximation techniques. Other examples, contained in [20, 19], show that the present approach allows to solve the problems of bounds on Lookback options with multiple intermediate marginals. Friday, November 2, 2012, 10.30-12.00 Room 126, 1st floor of the Extranef building at the University of Lausanne A stochastic control approach to no-arbitrage bounds given marginals, with an application to Lookback options∗ A. Galichon† P. Henry-Labordère‡ N. Touzi§ September 2011, revised March 2012 Abstract We consider the problem of superhedging under volatility uncertainty for an investor allowed to dynamically trade the underlying asset, and statically trade European call options for all possible strikes with some given maturity. This problem is classically approached by means of the Skorohod Embedding Problem (SEP). Instead, we provide a dual formulation which converts the superhedging problem into a continuous martingale optimal transportation problem. We then show that this formulation allows to recover previously known results about Lookback options. In particular, our methodology induces a new proof of the optimality of Azéma-Yor solution of the SEP for a certain class of Lookback options. Unlike the SEP technique, our approach applies to a large class of exotics and is suitable for numerical approximation techniques. Other examples, contained in [20, 19], show that the present approach allows to solve the problems of bounds on Lookback options with multiple intermediate marginals.We consider the problem of superhedging under volatility uncertainty for an investor allowed to dynamically trade the underlying asset, and statically trade European call options for all possible strikes with some given maturity. This problem is classically approached by means of the Skorohod Embedding Problem (SEP). Instead, we provide a dual formulation which converts the superhedging problem into a continuous martingale optimal transportation problem. We then show that this formulation allows to recover previously known results about Lookback options. In particular, our methodology induces a new proof of the optimality of Azéma-Yor solution of the SEP for a certain class of Lookback options. Unlike the SEP technique, our approach applies to a large class of exotics and is suitable for numerical approximation techniques. Other examples, contained in [20, 19], show that the present approach allows to solve the problems of bounds on Lookback options with multiple intermediate marginals.