A Markov-functional construction with a level-dependent drift on a flow variable calibrates time-homogeneous or continuous local volatility models to a discrete set of marginals.
A regularized Kellerer theorem in arbitrary dimension
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abstract
We present a multidimensional extension of Kellerer's theorem on the existence of mimicking Markov martingales for peacocks, a term derived from the French for stochastic processes increasing in convex order. For a continuous-time peacock in arbitrary dimension, after Gaussian regularization, we show that there exists a strongly Markovian mimicking martingale It\^o diffusion. A novel compactness result for martingale diffusions is a key tool in our proof. Moreover, we provide counterexamples to show, in dimension $d \geq 2$, that uniqueness may not hold, and that some regularization is necessary to guarantee existence of a mimicking Markov martingale.
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Markov-Functional Models with Local Drift
A Markov-functional construction with a level-dependent drift on a flow variable calibrates time-homogeneous or continuous local volatility models to a discrete set of marginals.