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

DOI10.1214/07-AAP474MaRDI QIDQ930669zbMATH OpenFDO

Authors Mikhail Urusov, Ludger Rüschendorf

Publication date 1 July 2008

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

Full work available at URL https://arxiv.org/abs/0806.2561

zbMATH Keywords

free boundary problemoptimal stoppinglocal timesEngelbert-Schmidt conditionoccupation times formulaone-dimensional SDEItô-Tanaka formula

Mathematics Subject Classification ID

Stochastic ordinary differential equations (aspects of stochastic analysis) (60H10) Stopping times; optimal stopping problems; gambling theory (60G40)

Abstract: In this paper, we introduce a modification of the free boundary problem related to optimal stopping problems for diffusion processes. This modification allows the application of this PDE method in cases where the usual regularity assumptions on the coefficients and on the gain function are not satisfied. We apply this method to the optimal stopping of integral functionals with exponential discount of the form $E_{x}in{t}_0^{au}{e}^{-lambdas}f(X_s)ds$, $lambdage0$ for one-dimensional diffusions $X$. We prove a general verification theorem which justifies the modified version of the free boundary problem. In the case of no drift and discount, the free boundary problem allows to give a complete and explicit discussion of the stopping problem.

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