Time discretization and quantization methods for optimal multiple switching problem

DOI10.1016/J.SPA.2012.02.008MaRDI QIDQ424519zbMATH OpenOpenAlexFDO

Authors Paul Gassiat, Idris Kharroubi, Huyên Pham

Publication date 1 June 2012

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

Full work available at URL https://arxiv.org/abs/1109.5256

zbMATH Keywords

Markov chainsoptimal switchingdiscrete-time approximationnumerical probabilityquantization of random variables

Mathematics Subject Classification ID

Numerical solutions to stochastic differential and integral equations (65C30) Mesh generation, refinement, and adaptive methods for boundary value problems involving PDEs (65N50) Optimal stochastic control (93E20)

Abstract: In this paper, we study probabilistic numerical methods based on optimal quantization algorithms for computing the solution to optimal multiple switching problems with regime-dependent state process. We first consider a discrete-time approximation of the optimal switching problem, and analyze its rate of convergence. Given a time step $h$, the error is in general of order $(hlog(1/h){)}^{1/2}$, and of order $h^{1/2}$ when the switching costs do not depend on the state process. We next propose quantization numerical schemes for the space discretization of the discrete-time Euler state process. A Markovian quantization approach relying on the optimal quantization of the normal distribution arising in the Euler scheme is analyzed. In the particular case of uncontrolled state process, we describe an alternative marginal quantization method, which extends the recursive algorithm for optimal stopping problems as in Bally-Pag`es (2003). A priori $L^p$-error estimates are stated in terms of quantization errors. Finally, some numerical tests are performed for an optimal switching problem with two regimes.

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Cited in

(4)

• An investment model with switching costs and the option to abandon
• Optimal switching problems with an infinite set of modes: an approach by randomization and constrained backward SDEs
• Optimal decision policy for real options under general Markovian dynamics
• A probabilistic numerical method for optimal multiple switching problems in high dimension

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