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Optimal stopping with dynamic variational preferences

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  • Daniel, Engelage

Abstract

We solve optimal stopping problems in uncertain environments for agents assessing utility by virtue of dynamic variational preferences as in Maccheroni, Marinacci and Rustichini (2006) [16] or, equivalently, assessing risk in terms of dynamic convex risk measures as in Cheridito, Delbaen and Kupper (2006) [4]. The solution is achieved by generalizing the approach in Riedel (2009) [21] introducing the concept of variational supermartingales and variational Snell envelopes with an accompanying theory. To illustrate results, we consider prominent examples: dynamic multiplier preferences and a dynamic version of generalized average value at risk introduced in Cheridito and Tianhui (2009) [5].

Suggested Citation

  • Daniel, Engelage, 2011. "Optimal stopping with dynamic variational preferences," Journal of Economic Theory, Elsevier, vol. 146(5), pages 2042-2074, September.
  • Handle: RePEc:eee:jetheo:v:146:y:2011:i:5:p:2042-2074
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    References listed on IDEAS

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    1. Riedel, Frank, 2004. "Dynamic coherent risk measures," Stochastic Processes and their Applications, Elsevier, vol. 112(2), pages 185-200, August.
    2. Frank Riedel, 2009. "Optimal Stopping With Multiple Priors," Econometrica, Econometric Society, vol. 77(3), pages 857-908, May.
    3. Fabio Maccheroni & Massimo Marinacci & Aldo Rustichini, 2006. "Ambiguity Aversion, Robustness, and the Variational Representation of Preferences," Econometrica, Econometric Society, vol. 74(6), pages 1447-1498, November.
    4. Jocelyne Bion-Nadal, 2008. "Dynamic risk measures: Time consistency and risk measures from BMO martingales," Finance and Stochastics, Springer, vol. 12(2), pages 219-244, April.
    5. Epstein, Larry G. & Schneider, Martin, 2003. "Recursive multiple-priors," Journal of Economic Theory, Elsevier, vol. 113(1), pages 1-31, November.
    6. Cheridito, Patrick & Stadje, Mitja, 2009. "Time-inconsistency of VaR and time-consistent alternatives," Finance Research Letters, Elsevier, vol. 6(1), pages 40-46, March.
    7. Philippe Artzner & Freddy Delbaen & Jean-Marc Eber & David Heath, 1999. "Coherent Measures of Risk," Mathematical Finance, Wiley Blackwell, vol. 9(3), pages 203-228.
    8. Rosazza Gianin, Emanuela, 2006. "Risk measures via g-expectations," Insurance: Mathematics and Economics, Elsevier, vol. 39(1), pages 19-34, August.
    9. Maccheroni, Fabio & Marinacci, Massimo & Rustichini, Aldo, 2006. "Dynamic variational preferences," Journal of Economic Theory, Elsevier, vol. 128(1), pages 4-44, May.
    10. Föllmer Hans & Penner Irina, 2006. "Convex risk measures and the dynamics of their penalty functions," Statistics & Risk Modeling, De Gruyter, vol. 24(1/2006), pages 1-36, July.
    11. Epstein, Larry G. & Marinacci, Massimo, 2007. "Mutual absolute continuity of multiple priors," Journal of Economic Theory, Elsevier, vol. 137(1), pages 716-720, November.
    12. Alexander Schied, 2007. "Optimal investments for risk- and ambiguity-averse preferences: a duality approach," Finance and Stochastics, Springer, vol. 11(1), pages 107-129, January.
    13. Patrick Cheridito & Tianhui Li, 2009. "Risk Measures On Orlicz Hearts," Mathematical Finance, Wiley Blackwell, vol. 19(2), pages 189-214.
    14. Hans Föllmer & Alexander Schied, 2002. "Convex measures of risk and trading constraints," Finance and Stochastics, Springer, vol. 6(4), pages 429-447.
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    Cited by:

    1. Guo, Peijun & Li, Yonggang, 2014. "Approaches to multistage one-shot decision making," European Journal of Operational Research, Elsevier, vol. 236(2), pages 612-623.

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