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A non convex singular stochastic control problem and its related optimal stopping boundaries

Author

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  • de Angelis, Tiziano

    (Center for Mathematical Economics, Bielefeld University)

  • Ferrari, Giorgio

    (Center for Mathematical Economics, Bielefeld University)

  • Moriarty, John

    (Center for Mathematical Economics, Bielefeld University)

Abstract

We show that the equivalence between certain problems of singular stochastic control (SSC) and related questions of optimal stopping known for convex performance criteria (see, for example, Karatzas and Shreve (1984)) continues to hold in a non convex problem provided a related discretionary stopping time is introduced. Our problem is one of storage and consumption for electricity, a partially storable commodity with both positive and negative prices in some markets, and has similarities to the finite fuel monotone follower problem. In particular we consider a non convex infinite time horizon SSC problem whose state consists of an uncontrolled diffusion representing a real-valued commodity price, and a controlled increasing bounded process representing an inventory. We analyse the geometry of the action and inaction regions by characterising the related optimal stopping boundaries.

Suggested Citation

  • de Angelis, Tiziano & Ferrari, Giorgio & Moriarty, John, 2016. "A non convex singular stochastic control problem and its related optimal stopping boundaries," Center for Mathematical Economics Working Papers 508, Center for Mathematical Economics, Bielefeld University.
  • Handle: RePEc:bie:wpaper:508
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    File URL: https://pub.uni-bielefeld.de/download/2901528/2902029
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    References listed on IDEAS

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    1. repec:dau:papers:123456789/1433 is not listed on IDEAS
    2. Giorgio Ferrari, 2012. "On an integral equation for the free-boundary of stochastic, irreversible investment problems," Papers 1211.0412, arXiv.org, revised Jan 2015.
    3. Pindyck, Robert S, 1988. "Irreversible Investment, Capacity Choice, and the Value of the Firm," American Economic Review, American Economic Association, vol. 78(5), pages 969-985, December.
    4. Hélyette Geman & Andrea Roncoroni, 2006. "Understanding the Fine Structure of Electricity Prices," The Journal of Business, University of Chicago Press, vol. 79(3), pages 1225-1262, May.
    5. Blanchet-Scalliet, Christophette & El Karoui, Nicole & Jeanblanc, Monique & Martellini, Lionel, 2008. "Optimal investment decisions when time-horizon is uncertain," Journal of Mathematical Economics, Elsevier, vol. 44(11), pages 1100-1113, December.
    6. Helyette Geman & A. Roncoroni, 2006. "Understanding the Fine Structure of Electricity Prices," Post-Print halshs-00144198, HAL.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Giorgio Ferrari & Shuzhen Yang, 2016. "On an Optimal Extraction Problem with Regime Switching," Papers 1602.06765, arXiv.org, revised Dec 2017.
    2. Ferrari, Giorgio & Yang, Shuzhen, 2016. "On an optimal extraction problem with regime switching," Center for Mathematical Economics Working Papers 562, Center for Mathematical Economics, Bielefeld University.
    3. de Angelis, Tiziano & Ferrari, Giorgio & Moriarty, John, 2016. "A solvable two-dimensional degenerate singular stochastic control problem with non convex costs," Center for Mathematical Economics Working Papers 531, Center for Mathematical Economics, Bielefeld University.
    4. de Angelis, Tiziano & Ferrari, Giorgio & Martyr, Randall & Moriarty, John, 2016. "Optimal entry to an irreversible investment plan with non convex costs," Center for Mathematical Economics Working Papers 566, Center for Mathematical Economics, Bielefeld University.
    5. de Angelis, Tiziano & Ferrari, Giorgio, 2016. "Stochastic nonzero-sum games: a new connection between singular control and optimal stopping," Center for Mathematical Economics Working Papers 565, Center for Mathematical Economics, Bielefeld University.
    6. Tiziano De Angelis & Erik Ekstrom, 2016. "The dividend problem with a finite horizon," Papers 1609.01655, arXiv.org, revised Nov 2017.
    7. de Angelis, Tiziano & Ferrari, Giorgio & Moriarty, John, 2016. "A solvable two-dimensional singular stochastic control problem with non convex costs," Center for Mathematical Economics Working Papers 561, Center for Mathematical Economics, Bielefeld University.

    More about this item

    Keywords

    finite-fuel singular stochastic control; optimal stopping; free-boundary; smooth- fit; Hamilton-Jacobi-Bellman equation; irreversible investment;

    JEL classification:

    • C02 - Mathematical and Quantitative Methods - - General - - - Mathematical Economics
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • D92 - Microeconomics - - Micro-Based Behavioral Economics - - - Intertemporal Firm Choice, Investment, Capacity, and Financing

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