Solving finite time horizon Dynkin games by optimal switching

DOI10.1017/JPR.2016.57zbMATH Open1355.91016arXiv1411.4438OpenAlexW3103140784MaRDI QIDQ2956502FDOQ2956502

Randall Martyr

Publication date: 17 January 2017

Published in: Journal of Applied Probability (Search for Journal in Brave)

Abstract: This paper uses recent results on continuous-time finite-horizon optimal switching problems with negative switching costs to prove the existence of a saddle point in an optimal stopping (Dynkin) game. Sufficient conditions for the game's value to be continuous with respect to the time horizon are obtained using recent results on norm estimates for doubly reflected backward stochastic differential equations. This theory is then demonstrated numerically for the special cases of cancellable call and put options in a Black-Scholes market.

Full work available at URL: https://arxiv.org/abs/1411.4438

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zbMATH Keywords

Nash equilibriumoptimal stoppingsaddle pointoptimal switchingSnell envelopeoptimal stopping game

Mathematics Subject Classification ID

Derivative securities (option pricing, hedging, etc.) (91G20) 2-person games (91A05) Stopping times; optimal stopping problems; gambling theory (60G40) Stochastic games, stochastic differential games (91A15) Games of timing (91A55) Probabilistic games; gambling (91A60)

Cited In (3)

• Finite-horizon optimal multiple switching with signed switching costs
• Switching surfaces in linear differentialgames with a fixed instant of termination
• A probabilistic verification theorem for the finite horizon two-player zero-sum optimal switching game in continuous time

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