An Iterated Az\'{e}ma-Yor Type Embedding for Finitely Many Marginals

TL;DR

This paper presents an explicit iterated embedding solution for the n-marginal Skorokhod problem, extending previous methods and enabling applications in robust option pricing and hedging.

Contribution

It introduces a new explicit construction for the n-marginal Skorokhod embedding problem for continuous martingales, generalizing Azéma-Yor type solutions.

Findings

Constructs explicit embeddings for multiple marginals in convex order

Recovers known stopping boundaries from prior research

Analyzes the distribution of the maximum at each stopping time

Abstract

We solve the $n$-marginal Skorokhod embedding problem for a continuous local martingale and a sequence of probability measures $\mu_1,...,\mu_n$ 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.