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An optimal stopping problem in a diffusion-type model with delay

Author

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  • Gapeev, Pavel V.
  • Reiß, Markus

Abstract

We present an explicit solution to an optimal stopping problem in a model described by a stochastic delay differential equation with an exponential delay measure. The method of proof is based on reducing the initial problem to a free-boundary problem and solving the latter by means of the smooth-fit condition. The problem can be interpreted as pricing special perpetual average American put options in a diffusion-type model with delay.

Suggested Citation

  • Gapeev, Pavel V. & Reiß, Markus, 2006. "An optimal stopping problem in a diffusion-type model with delay," Statistics & Probability Letters, Elsevier, vol. 76(6), pages 601-608, March.
    • Handle: RePEc:eee:stapro:v:76:y:2006:i:6:p:601-608
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    Cited by:

    1. Gapeev, Pavel V., 2020. "Optimal stopping problems for running minima with positive discounting rates," LSE Research Online Documents on Economics 105849, London School of Economics and Political Science, LSE Library.
    2. Gapeev, Pavel V., 2008. "The integral option in a model with jumps," Statistics & Probability Letters, Elsevier, vol. 78(16), pages 2623-2631, November.
    3. Marie Bernhart & Peter Tankov & Xavier Warin, 2010. "A finite dimensional approximation for pricing moving average options," Papers 1011.3599, arXiv.org.
    4. Gapeev, Pavel V., 2020. "Optimal stopping problems for running minima with positive discounting rates," Statistics & Probability Letters, Elsevier, vol. 167(C).

    More about this item

    Keywords

    Optimal stopping Stochastic delay differential equation Diffusion process Sufficient statistic Free-boundary problem Smooth fit Girsanov's theorem Ito's formula;

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis

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