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An Iteration Procedure for Solving Integral Equations Related to Optimal Stopping Problems

  • Denis Belomestny
  • Pavel V. Gapeev

A new algorithm for finding value functions of finite horizon optimal stopping problems in one-dimensional diffusion models is presented. It is based on a time discretization of the corresponding integral equation. The proposed iterative procedure for solving the discretized integral equation converges in a finite number of steps and delivers in each step a lower or an upper bound for value of discretized problem on the whole time interval. The remarks on the application of the method for solving integral equations related to some optimal stopping problems are given.

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File URL: http://sfb649.wiwi.hu-berlin.de/papers/pdf/SFB649DP2006-043.pdf
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Paper provided by Sonderforschungsbereich 649, Humboldt University, Berlin, Germany in its series SFB 649 Discussion Papers with number SFB649DP2006-043.

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Length: 18 pages
Date of creation: May 2006
Date of revision:
Handle: RePEc:hum:wpaper:sfb649dp2006-043
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  1. Alexander Novikov & Albert Shiryaev, 2004. "On an Effective Solution of the Optimal Stopping Problem for Random Walks," Research Paper Series 131, Quantitative Finance Research Centre, University of Technology, Sydney.
  2. Gapeev, P.V. & Peskir, G., 2006. "The Wiener disorder problem with finite horizon," Stochastic Processes and their Applications, Elsevier, vol. 116(12), pages 1770-1791, December.
  3. Peter Carr & Robert Jarrow & Ravi Myneni, 1992. "Alternative Characterizations Of American Put Options," Mathematical Finance, Wiley Blackwell, vol. 2(2), pages 87-106.
  4. L. C. G. Rogers, 2002. "Monte Carlo valuation of American options," Mathematical Finance, Wiley Blackwell, vol. 12(3), pages 271-286.
  5. Carr, Peter, 1998. "Randomization and the American Put," Review of Financial Studies, Society for Financial Studies, vol. 11(3), pages 597-626.
  6. Denis Belomestny & Grigori Milstein, 2006. "Adaptive Simulation Algorithms for Pricing American and Bermudian Options by Local Analysis of Financial Market," SFB 649 Discussion Papers SFB649DP2006-038, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
  7. Kim, In Joon, 1990. "The Analytic Valuation of American Options," Review of Financial Studies, Society for Financial Studies, vol. 3(4), pages 547-72.
  8. S. D. Jacka, 1991. "Optimal Stopping and the American Put," Mathematical Finance, Wiley Blackwell, vol. 1(2), pages 1-14.
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