Variational View to Optimal Stopping Problems for Diffusion Processes and Threshold Strategies

arXiv1508.01184MaRDI QIDQ6264255FDOQ6264255

Authors: Vadim I. Arkin, Alexander D. Slastnikov 

Publication date: 5 August 2015

Abstract: We describe a variational approach to solving optimal stopping problems for diffusion processes, as an alternative to the traditional approach based on the solution of the free-boundary problem. We study smooth pasting conditions from a variational point of view, and give some examples when the solution to free-boundary problem is not the solution to optimal stopping problem. A special attention is paid to threshold strategies which allow reduce optimal stopping problem to more simple one-parametric optimization. Necessary and sufficient conditions for threshold structure of optimal stopping time are derived. We apply these results to both investment timing and optimal abandon models.

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