English

Multi-Dimensional Martingales from Mutual Information

Probability 2025-12-19 v1

Abstract

In the context of Risk Neutral Pricing theory, we consider the classic problem of calibrating a martingale over Rn\mathbb{R}^n to a finite number of marginals thereof, or more practically, to prices of an arbitrary finite set of (joint) European contingent claims. For n=1n=1, one can rely on the work of Dupire, while for n2n\geq 2 an analogous natural unique construction seems to be lacking. We provide such a unique candidate as the result of pure Martingale Entropic Optimal Transport. As a byproduct, the latter allows us to obtain a constructive proof of a classic result of Strassen. Finally, and in contrast to the proposed approach, we prove a result that demonstrates how a certain class of local correlation models fails in general to calibrate to basket option prices, particularly in the foreign exchange market.

Keywords

Cite

@article{arxiv.2512.16544,
  title  = {Multi-Dimensional Martingales from Mutual Information},
  author = {Michael M. Kay},
  journal= {arXiv preprint arXiv:2512.16544},
  year   = {2025}
}
R2 v1 2026-07-01T08:31:26.896Z