Remarks on multi-period martingale optimal transport

TL;DR

This paper investigates the structural properties of multi-period martingale optimal transport, providing new tools, uniqueness results, and explicit solutions, with applications to option pricing based on Amazon stock prices.

Contribution

It introduces novel methods for analyzing multi-period MOT, including conditions for coupling and optimality, and characterizes solutions in three-period problems with real-world financial applications.

Findings

Established conditions for gluing two-period martingale couplings.

Proved uniqueness and explicit structure of solutions under certain assumptions.

Provided model-independent bounds for options on Amazon stock prices.

Abstract

We study the structural properties of multi-period martingale optimal transport (MOT). We develop new tools to address these problems, and use them to prove several uniqueness and structural results on three-period martingale optimal transport. More precisely, we establish lemmas on how and when two-period martingale couplings may be glued together to obtain multi-period martingales and which among these glueings are optimal for particular MOT problems. We use these optimality results to study limits of solutions under convergence of the cost function and obtain a corresponding linearization of the optimal cost. We go on to establish a complete characterization of limiting solutions in a three-period problem as the interaction between two of the variables vanishes. Under additional assumptions, we show uniqueness of the solution and a structural result which yields the solution essentially explicitly. For the full three-period problem, we also obtain several structural and uniqueness results under a variety of different assumptions on the marginals and cost function. We illustrate our results with a real world application, providing approximate model independent upper and lower bounds for options depending on Amazon stock prices at three different times. We compare these bounds to prices computed using certain models.