Constrained optimal stopping, liquidity and effort

DOI10.1016/J.SPA.2019.10.010zbMATH Open1494.60043arXiv1901.07270OpenAlexW2988026953WikidataQ126833271 ScholiaQ126833271MaRDI QIDQ2145802FDOQ2145802

David Hobson, Matthew Zeng

Publication date: 20 June 2022

Published in: Stochastic Processes and their Applications (Search for Journal in Brave)

Abstract: In a classical optimal stopping problem in continuous time, the agent can choose any stopping time without constraint. Dupuis and Wang (Optimal stopping with random intervention times, Advances in Applied Probability, 34, 141--157, 2002) introduced a constraint on the class of admissible stopping times which was that they had to take values in the set of event times of an exogenous, time-homogeneous Poisson process. This can be thought of as a model of finite liquidity. In this article we extend the analysis of Dupuis and Wang to allow the agent to choose the rate of the Poisson process. Choosing a higher rate leads to a higher cost. Even for a simple model for the stopped process and a simple call-style payoff, the problem leads to a rich range of optimal behaviours which depend on the form of the cost function. Often the agent accepts the first offer --- if they are not going to accept an offer then there is no point in putting in effort to generate offers, and thus there may be no offers to accept or decline --- but for some set-ups this is not the case.

Full work available at URL: https://arxiv.org/abs/1901.07270

zbMATH Keywords

Poisson processoptimal stoppingliquidity

Mathematics Subject Classification ID

Stopping times; optimal stopping problems; gambling theory (60G40)

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Cited In (5)

• Optimal stopping and dynamic allocation
• Constrained optimal stopping under a regime-switching model
• Solutions for Poissonian stopping problems of linear diffusions via extremal processes
• A zero-sum Poisson stopping game with asymmetric signal rates
• Callable convertible bonds under liquidity constraints and hybrid priorities

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