Maturity randomization for stochastic control problems

DOI10.1214/105051605000000593MaRDI QIDQ2496502zbMATH OpenOpenAlexFDO

Authors Bruno Bouchard, Nizar Touzi, Nicole El Karoui

Publication date 10 July 2006

Published in The Annals of Applied Probability (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/math/0602462

zbMATH Keywords

optimal stoppingstochastic controluncertain volatility models

Mathematics Subject Classification ID

Integral representations of solutions to PDEs (35C15) Actuarial science and mathematical finance (91Gxx) Optimal stochastic control (93E20)

Abstract: We study a maturity randomization technique for approximating optimal control problems. The algorithm is based on a sequence of control problems with random terminal horizon which converges to the original one. This is a generalization of the so-called Canadization procedure suggested by Carr [Review of Financial Studies II (1998) 597--626] for the fast computation of American put option prices. In addition to the original application of this technique to optimal stopping problems, we provide an application to another problem in finance, namely the super-replication problem under stochastic volatility, and we show that the approximating value functions can be computed explicitly.

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Cited in

(10)

• American options under stochastic volatility: control variates, maturity randomization \& multiscale asymptotics
• A variation of the Canadisation algorithm for the pricing of American options driven by Lévy processes
• Optimal switching problems with an infinite set of modes: an approach by randomization and constrained backward SDEs
• Exercisability Randomization of the American Option
• Efficient pricing of swing options in Lévy-driven models
• Double barrier options in regime-switching hyper-exponential jump-diffusion models
• A Dynkin game with asymmetric information
• A simple Wiener-Hopf factorization approach for pricing double-barrier options
• Optimal exit strategies for investment projects
• An analytic recursive method for optimal multiple stopping: Canadization and phase-type fitting

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