A capped optimal stopping problem for the maximum process
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Abstract: This paper concerns an optimal stopping problem driven by the running maximum of a spectrally negative Levy process X. More precisely, we are interested in capped versions of the American lookback optimal stopping problem, which has its origins in mathematical finance, and provide semi-explicit solutions in terms of scale functions. The optimal stopping boundary is characterised by an ordinary first-order differential equation involving scale functions and, in particular, changes according to the path variation of X. Furthermore, we will link these capped problems to Peskir's maximality principle.
The authors consider an optimal stopping problem driven by the running maximum of a spectrally negative Lévy process. In particular, they are interested in capped versions of the American lookback option; this is clearly explained in Section 2 of the paper. They provide semi-explicit solutions in terms of the scale functions and show that the optimal stopping boundary is characterized by a first order ODE involving scale functions. The solutions are based on a ``guess and verify technique. The ``guess part is carefully explained in Section 7, while the verification is contained in Section 9, which includes all the proofs of the paper. The paper is very well written, contains many references and explains the connections to the relevant literature on optimal stopping problems.
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Cited in
(18)- An optimal stopping problem for spectrally negative Markov additive processes
- Perpetual American double lookback options on drawdowns and drawups with floating strikes
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