2013/04/01 by Jan Obłój, Obłój, Jan, Peter Spoida +1
Economics, Econometrics and Finance · Mathematics · #FOS: Economics and business #FOS: Mathematics #Pricing of Securities (q-fin.PR) #Probability (math.PR) #math.PR #q-fin.PR
paper · pdf · doi:10.48550/arxiv.1304.0368
arxiv created 2014/01/06 · arxiv updated 2014/01/07
We solve the n-marginal Skorokhod embedding problem for a continuous local martingale and a sequence of probability measures μ1,...,μn which are in convex order and satisfy an additional technical assumption. Our construction is explicit and is a multiple marginal generalisation of the Azema and Yor (1979) solution. In particular, we recover the stopping boundaries obtained by Brown et al. (2001) and Madan and Yor (2002). Our technical assumption is necessary for the explicit embedding, as demonstrated with a counterexample. We discuss extensions to the general case giving details when n=3. In our analysis we compute the law of the maximum at each of the n stopping times. This is used in Henry-Labordere et al. (2013) to show that the construction maximises the distribution of the maximum among all solutions to the n-marginal Skorokhod embedding problem. The result has direct implications for robust pricing and hedging of Lookback options.