The solution of discretionary stopping problems with applications to the optimal timing of investment decisions
AbstractWe present a methodology for obtaining explicit solutions to infinite time horizon optimal stopping problems involving general, one-dimensional, It\^o diffusions, payoff functions that need not be smooth and state-dependent discounting. This is done within a framework based on dynamic programming techniques employing variational inequalities and links to the probabilistic approaches employing $r$-excessive functions and martingale theory. The aim of this paper is to facilitate the the solution of a wide variety of problems, particularly in finance or economics.
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Bibliographic InfoPaper provided by arXiv.org in its series Papers with number 1210.2617.
Date of creation: Oct 2012
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Web page: http://arxiv.org/
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- McDonald, Robert & Siegel, Daniel, 1986. "The Value of Waiting to Invest," The Quarterly Journal of Economics, MIT Press, vol. 101(4), pages 707-27, November.
- Henderson, Vicky & Hobson, David G., 2002. "Real options with constant relative risk aversion," Journal of Economic Dynamics and Control, Elsevier, vol. 27(2), pages 329-355, December.
- Lamberton, Damien, 2009. "Optimal stopping with irregular reward functions," Stochastic Processes and their Applications, Elsevier, vol. 119(10), pages 3253-3284, October.
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