Optimal expulsion and optimal confinement of a Brownian particle with a switching cost

DOI10.1016/J.SPA.2014.07.016MaRDI QIDQ744235zbMATH OpenOpenAlexFDO

Authors Robert C. Dalang, Laura Vinckenbosch

Publication date 6 October 2014

Published in Stochastic Processes and their Applications (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/1211.1595

zbMATH Keywords

free boundary problemsmartingale methodprinciple of smooth fitstochastic control with switching cost

Mathematics Subject Classification ID

Brownian motion (60J65) Stopping times; optimal stopping problems; gambling theory (60G40) Other game-theoretic models (91A40) Optimal stochastic control (93E20)

Abstract: We solve two stochastic control problems in which a player tries to minimize or maximize the exit time from an interval of a Brownian particle, by controlling its drift. The player can change from one drift to another but is subject to a switching cost. In each problem, the value function is written as the solution of a free boundary problem involving second order ordinary differential equations, in which the unknown boundaries are found by applying the principle of smooth fit. For both problems, we compute the value function, we exhibit the optimal strategy and we prove its generic uniqueness.

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Cited in

(3)

• Maximizing the mean exit time of a Brownian motion from an interval
• Optimal switching between a pair of Brownian motions
• SKOROKHOD EMBEDDINGS IN BOUNDED TIME

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