On a class of optimal stopping problems for diffusions with discontinuous coefficients (Q930669)

The authors study a class of optimal stopping problems for integral functionals with exponential discount \[ {\mathbf E}_x \int^\tau_0 e^{-\lambda s} f(X_s)\,ds \] for a one-dimensional diffusion \((X_s)\) with not necessarily continuous coefficients and a class of not necessarily continuous (cumulative) gain functions \(f\). A corresponding generalized formulation of the free boundary problem is given, and a verification theorem, as well as uniqueness results for that generalized problem and the optimal stopping time, are proved. An essential step in establishing the verification theorem is the proof of variational inequalities for the solution of the generalized free boundary problem. The case of diffusions without drift, and with zero discount is studied in full detail: Necessary and sufficient conditions for the existence of solutions of the generalized free boundary problem are given. If that problem has no solution, the optimal stopping problem is solved. Finiteness of the value function is discussed, and explicit formulas for the value function and the optimal stopping time are obtained. In case an optimal stopping time does not exist, asymptotically optimal sequences of stopping times are determined.