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Optimal switching decisions under stochastic volatility with fast mean reversion

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  • Tsekrekos, Andrianos E.
  • Yannacopoulos, Athanasios N.

Abstract

We study infinite-horizon, optimal switching problems for underlying processes that exhibiting “fast” mean-reverting stochastic volatility. We obtain closed-form analytic approximations of the solution for the resulting quasi-variational inequalities, that provide quantitative and qualitative results for the effects of multi-scale variability of the underlying process on the optimal switching rule. The proposed methodology is applicable to a number of operations research problems involving switching flexibility.

Suggested Citation

  • Tsekrekos, Andrianos E. & Yannacopoulos, Athanasios N., 2016. "Optimal switching decisions under stochastic volatility with fast mean reversion," European Journal of Operational Research, Elsevier, vol. 251(1), pages 148-157.
  • Handle: RePEc:eee:ejores:v:251:y:2016:i:1:p:148-157
    DOI: 10.1016/j.ejor.2015.12.011
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