Optimal stopping and free boundary characterizations for some Brownian control problems

DOI10.1214/08-AAP525zbMATH Open1158.93032OpenAlexW3099299885MaRDI QIDQ2378635FDOQ2378635

Authors Amarjit Budhiraja, Kevin Ross

Publication date 13 January 2009

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

Full work available at URL https://arxiv.org/abs/0901.2474

zbMATH Keywords

free boundaryHamilton-Jacobi-Bellman equationsoptimal stoppingviscosity solutionsBrownian control problem\(\epsilon\)-optimal stopping timesingular control with state constrains

Mathematics Subject Classification ID

Nonlinear elliptic equations (35J60) Existence of optimal solutions belonging to restricted classes (Lipschitz controls, bang-bang controls, etc.) (49J30) Viscosity solutions to Hamilton-Jacobi equations in optimal control and differential games (49L25) Stopping times; optimal stopping problems; gambling theory (60G40) Optimal stochastic control (93E20)

Abstract: A singular stochastic control problem with state constraints in two-dimensions is studied. We show that the value function is $C^1$ and its directional derivatives are the value functions of certain optimal stopping problems. Guided by the optimal stopping problem, we then introduce the associated no-action region and the free boundary and show that, under appropriate conditions, an optimally controlled process is a Brownian motion in the no-action region with reflection at the free boundary. This proves a conjecture of Martins, Shreve and Soner [SIAM J. Control Optim. 34 (1996) 2133--2171] on the form of an optimal control for this class of singular control problems. An important issue in our analysis is that the running cost is Lipschitz but not $C^1$. This lack of smoothness is one of the key obstacles in establishing regularity of the free boundary and of the value function. We show that the free boundary is Lipschitz and that the value function is $C^2$ in the interior of the no-action region. We then use a verification argument applied to a suitable $C^2$ approximation of the value function to establish optimality of the conjectured control.

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