Solving finite time horizon Dynkin games by optimal switching

DOI10.1017/JPR.2016.57MaRDI QIDQ2956502zbMATH OpenOpenAlexFDO

Authors Randall Martyr

Publication date 17 January 2017

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

Full work available at URL https://arxiv.org/abs/1411.4438, https://projecteuclid.org/euclid.jap/1481132829

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)

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.

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Cited in

(5)

• The Dynkin game with regime switching and applications to pricing game options
• Finite-horizon optimal multiple switching with signed switching costs
• Dynkin games with Poisson random intervention times
• 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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