A general method for finding the optimal threshold in discrete time

DOI10.1080/17442508.2018.1541991zbMATH Open1498.60159arXiv1710.08250OpenAlexW2963623398WikidataQ128993051 ScholiaQ128993051MaRDI QIDQ5087022FDOQ5087022

Authors: Sören Christensen, Albrecht Irle 

Publication date: 8 July 2022

Published in: Stochastics (Search for Journal in Brave)

Abstract: We develop an approach for solving one-sided optimal stopping problems in discrete time for general underlying Markov processes on the real line. The main idea is to transform the problem into an auxiliary problem for the ladder height variables. In case that the original problem has a one-sided solution and the auxiliary problem has a monotone structure, the corresponding myopic stopping time is optimal for the original problem as well. This elementary line of argument directly leads to a characterization of the optimal boundary in the original problem: The optimal threshold is given by the threshold of the myopic stopping time in the auxiliary problem. Supplying also a sufficient condition for our approach to work, we obtain solutions for many prominent examples in the literature, among others the problems of Novikov-Shiryaev, Shepp-Shiryaev, and the American put in option pricing under general conditions. As a further application we show that for underlying random walks (and L'evy processes in continuous time), the reward functions $g$ leading to one-sided stopping problems are exactly the monotone and log-concave functions.

Full work available at URL: https://arxiv.org/abs/1710.08250

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zbMATH Keywords

optimal stoppingdiscrete timeexplicit solutionsmonotone stopping rulesthreshold timesmyopic stopping timeNovikov-Shiryaev

Mathematics Subject Classification ID

Processes with independent increments; Lévy processes (60G51) Stopping times; optimal stopping problems; gambling theory (60G40)

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