Local times, optimal stopping and semimartingales (Q2365749)

The author considers a martingale \(X\) such that \(X\) and its Snell envelope \(S\) are continuous and in \(H^ 1\). He gives a maximal characterization of \(S\) in terms of a stochastic differential equation involving the local time of \(S-X\) at zero. This result is applied to the optimal stopping problem for continuous functions of diffusions, yielding sufficient conditions for the smooth pasting condition to hold. Finally, the intuitive assertion that \(S\) is ``a martingale on the go-region and equal to \(X\) on the stop-region'' is shown to be incorrect by a counterexample.