An explicit solution for an optimal stopping/optimal control problem which models an asset sale
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Publication:957514
DOI10.1214/07-AAP511zbMATH Open1165.60021arXiv0806.4061OpenAlexW2156536863MaRDI QIDQ957514FDOQ957514
Authors: Vicky Henderson, David Hobson 
Publication date: 27 November 2008
Published in: The Annals of Applied Probability (Search for Journal in Brave)
Abstract: In this article we study an optimal stopping/optimal control problem which models the decision facing a risk-averse agent over when to sell an asset. The market is incomplete so that the asset exposure cannot be hedged. In addition to the decision over when to sell, the agent has to choose a control strategy which corresponds to a feasible wealth process. We formulate this problem as one involving the choice of a stopping time and a martingale. We conjecture the form of the solution and verify that the candidate solution is equal to the value function. The interesting features of the solution are that it is available in a very explicit form, that for some parameter values the optimal strategy is more sophisticated than might originally be expected, and that although the setup is based on continuous diffusions, the optimal martingale may involve a jump process. One interpretation of the solution is that it is optimal for the risk-averse agent to gamble.
Full work available at URL: https://arxiv.org/abs/0806.4061
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Stopping times; optimal stopping problems; gambling theory (60G40) Martingales with continuous parameter (60G44) Optimal stochastic control (93E20) Probabilistic games; gambling (91A60)
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Cited In (17)
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- Optimal investment with stopping in finite horizon
- Exit option for a class of profit functions
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- Optimal stopping and reselling of European options
- Explicit solutions for an optimal stock selling problem under a Markov chain model
- On singular control of reflected diffusions
- Optimal consumption and sale strategies for a risk averse agent
- Global closed-form approximation of free boundary for optimal investment stopping problems
- Penalized schemes for Hamilton-Jacobi-Bellman quasi-variational inequalities arising in regime switching utility maximization with optimal stopping
- Convergence of option rewards for multivariate price processes
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