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Distribution‐constrained optimal stopping

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  • Erhan Bayraktar
  • Christopher W. Miller

Abstract

We solve the problem of optimal stopping of a Brownian motion subject to the constraint that the stopping time's distribution is a given measure consisting of finitely many atoms. In particular, we show that this problem can be converted to a finite sequence of state‐constrained optimal control problems with additional states corresponding to the conditional probability of stopping at each possible terminal time. The proof of this correspondence relies on a new variation of the dynamic programming principle for state‐constrained problems, which avoids measurable selections. We emphasize that distribution constraints lead to novel and interesting mathematical problems on their own, but also demonstrate an application in mathematical finance to model‐free superhedging with an outlook on volatility.

Suggested Citation

  • Erhan Bayraktar & Christopher W. Miller, 2019. "Distribution‐constrained optimal stopping," Mathematical Finance, Wiley Blackwell, vol. 29(1), pages 368-406, January.
    • Handle: RePEc:bla:mathfi:v:29:y:2019:i:1:p:368-406
    DOI: 10.1111/mafi.12171
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    Cited by:

    1. Christopher W. Miller, 2016. "A Duality Result for Robust Optimization with Expectation Constraints," Papers 1610.01227, arXiv.org.
    2. Sigrid Kallblad, 2017. "A Dynamic Programming Principle for Distribution-Constrained Optimal Stopping," Papers 1703.08534, arXiv.org.
    3. Soren Christensen & Kristoffer Lindensjo, 2019. "Moment constrained optimal dividends: precommitment \& consistent planning," Papers 1909.10749, arXiv.org.
    4. Shantanu Awasthi & Indranil SenGupta, 2020. "First exit-time analysis for an approximate Barndorff-Nielsen and Shephard model with stationary self-decomposable variance process," Papers 2006.07167, arXiv.org, revised Jan 2021.
    5. Bayraktar, Erhan & Yao, Song, 2024. "Stochastic control/stopping problem with expectation constraints," Stochastic Processes and their Applications, Elsevier, vol. 176(C).

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