Abstract
We solve the $n$-marginal Skorokhod embedding problem for a continuous local martingale and a sequence of probability measures $\mu_{1},\ldots,\mu_{n}$ which are in convex order and satisfy an additional technical assumption. Our construction is explicit and is a multiple marginal generalization of the Azéma and Yor [In Séminaire de Probabilités, XIII (Univ. Strasbourg, Strasbourg, 1977/78) (1979) 90–115 Springer] solution. In particular, we recover the stopping boundaries obtained by Brown, Hobson and Rogers [Probab. Theory Related Fields 119 (2001) 558–578] and Madan and Yor [Bernoulli 8 (2002) 509–536]. 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-Labordère et al. [Ann. Appl. Probab. 26 (2016) 1–44] to show that the construction maximizes 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.
Citation
Jan Obłój. Peter Spoida. "An iterated Azéma–Yor type embedding for finitely many marginals." Ann. Probab. 45 (4) 2210 - 2247, July 2017. https://doi.org/10.1214/16-AOP1110
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