A simulation approach to optimal stopping under partial information (Q1045791): Difference between revisions

This paper studies the numerical solution of nonlinear partially observed optimal stopping problems. The system state is a multi-dimensional diffusion and drives the drift of the observation process, which is another multi-dimensional diffusion with correlated noise. Such models where the controller is not fully aware of their environment are of interest in applied probability and financial mathematics. A new approximate numerical algorithm based on the particle filtering and regression Monte Carlo methods is proposed. The algorithm maintains a continuous state space and yields an integrated approach to the filtering and control sub-problems. Presented approach is entirely simulation-based and therefore allows for a robust implementation with respect to model specification. An extension to discretely observed stochastic volatility models is considered.