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

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  • Dalang, Robert C.
  • Vinckenbosch, Laura

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.

Suggested Citation

  • Dalang, Robert C. & Vinckenbosch, Laura, 2014. "Optimal expulsion and optimal confinement of a Brownian particle with a switching cost," Stochastic Processes and their Applications, Elsevier, vol. 124(12), pages 4050-4079.
    • Handle: RePEc:eee:spapps:v:124:y:2014:i:12:p:4050-4079
    DOI: 10.1016/j.spa.2014.07.016
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    References listed on IDEAS

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    1. Salles, J. L. F. & do Val, J. B. R., 2001. "An impulse control problem of a production model with interruptions to follow stochastic demand," European Journal of Operational Research, Elsevier, vol. 132(1), pages 123-145, July.
    2. Erhan Bayraktar & Masahiko Egami, 2010. "On the One-Dimensional Optimal Switching Problem," Mathematics of Operations Research, INFORMS, vol. 35(1), pages 140-159, February.
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    Cited by:

    1. Zhenya Liu & Yuhao Mu, 2022. "Optimal Stopping Methods for Investment Decisions: A Literature Review," IJFS, MDPI, vol. 10(4), pages 1-23, October.

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