An optimal stopping problem in a diffusion-type model with delay (Q2489871)
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English | An optimal stopping problem in a diffusion-type model with delay |
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An optimal stopping problem in a diffusion-type model with delay (English)
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28 April 2006
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Let \(W=(W_{t},t\geq 0)\) be a standard Wiener process on a probaility space and \(X=(X_{t},t\in{\mathbb R})\) be a continuous process solving the differential equation \[ d X_{t}=-(\theta^{2}/2)(X_{t}-\lambda Y_{t})^{2}\,dt+\theta(X_{t}-\lambda Y_{t})\, dW_{t}, \quad t\geq 0, \qquad X_{0}=x, \] where \((Y_{t},t\geq 0)\) is defined by \(Y_{t}=\int_{-\infty}^{0}\text{ e}^{\lambda s}X_{t+s}\,ds\), \(X_{t}=X_{t}^{0}\) (a bounded deterministic measurable function) for \(t\leq 0\), with \(\theta>0\), \(\lambda>0\), and \(x\in{\mathbb R}\) given and fixed. The process \(X\) can be thought of describing the logarithm of a (discount) stock price on a financial market. The goal of this paper is to compute the value: \[ V_{\ast}=\sup_{\tau}E[\text{e}^{-\delta t}(K\text{ e}^{\lambda Y_{t}}-\text{ e}^{X_{t}})^{+}], \] where the supremum is taken over all finite stopping times \(\tau\) of the process \(X\). The value \(V_{\ast}\) can be interpreted as an arbitrage-free price of a special average American put option, where \(K>0\) and \(\delta>0\) are some given constants. Related papers: \textit{D. O. Kramkov} and \textit{E. Mordecki} [Theory Probab. Appl. 39, No. 1, 162--172 (1994); translation from Teor. Veroyatn. Primen. 39, No. 1, 201--211 (1994; Zbl 0836.90012)]; \textit{B. Øksendal} [Preprint No. 23, Pure Mathematics, Dept. of Math., Univ. of Oslo (2004)].
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Stochastic delay differential equation
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Diffusion process
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Sufficient statistic
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Free-boundary problem
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Smooth fit
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Girsanov's theorem
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Itô's formula
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