Existence and explicit determination of optimal stopping times

We consider large classes of continuous time optimal stopping problems for which we establish the existence and form of the optimal stopping times. These optimal times are then used to find approximate optimal solutions for a class of discrete time problems.     

Game options with gradual exercise and cancellation under proportional transaction costs

ABSTRACT

Game (Israeli) options in a multi-asset market model with proportional transaction costs are studied in the case when the buyer is allowed to exercise the option and the seller has the right to cancel the option gradually at a mixed (or randomized) stopping time, rather than instantly at an ordinary stopping time. Allowing gradual exercise and cancellation leads to increased flexibility in hedging, and hence tighter bounds on the option price as compared to the case of instantaneous exercise and cancellation. Algorithmic constructions for the bid and ask prices, and the associated superhedging strategies and optimal mixed stopping times for both exercise and cancellation are developed and illustrated. Probabilistic dual representations for bid and ask prices are also established.     

Risk-sensitive stopping problems for continuous-time Markov chains

In this paper we consider stopping problems for continuous-time Markov chains under a general risk-sensitive optimization criterion for problems with finite and infinite time horizon. More precisely our aim is to maximize the certainty equivalent of the stopping reward minus cost over the time horizon. We derive optimality equations for the value functions and prove the existence of optimal stopping times. The exponential utility is treated as a special case. In contrast to risk-neutral stopping problems it may be optimal to stop between jumps of the Markov chain. We briefly discuss the influence of the risk sensitivity on the optimal stopping time and consider a special house selling problem as an example.     

Formulas for stopped diffusion processes with stopping times based on drawdowns and drawups

This paper studies drawdown and drawup processes in a general diffusion model. The main result is a formula for the joint distribution of the running minimum and the running maximum of the process stopped at the time of the first drop of size a$a$. As a consequence, we obtain the probabilities that a drawdown of size a$a$ precedes a drawup of size b$b$ and vice versa. The results are applied to several examples of diffusion processes, such as drifted Brownian motion, Ornstein–Uhlenbeck process, and Cox–Ingersoll–Ross process.     

Limit behaviour of focusing solutions to nonlinear diffusions

The paper is concerned with the behaviour of focusing solutions to nonlinear diffusion problems. These solutions describe the movement of a flow filling a hole and have consequences for the qualitative theory of degenerate nonlinear parabolic equations. The general equation under study is theso-called doubly nonlinear diffusion equation a²with parameters m > 0 and p > 1 such that m(p - 1) > 1 so that the finite propagation property holds and free boundaries occur. Well-known particular cases are the Porous Medium Equation and the evolutionary p-

Laplacian Equation. We study the behaviour of the families of selfsimilar focusing solutions as the parameters m and p tend to their limiting values and identify the limit problems these limits solve. In the case m(p - 1) -+ 1 we find as appropriate asymptotic problems a family of Hamilton-Jacobi equations. When we let m + ffi we obtain in the limit the Hele-Shaw problem. When p + cc we

obtain linear travelling waves with arbitrary speed, solutions of a certain ∞-Laplacian evolution problem.     

An Efficient Algorithm for Simulating the Drawdown Stopping Time and the Running Maximum of a Brownian Motion

We define the drawdown stopping time of a Brownian motion as the first time its drawdown reaches a duration of length 1. In this paper, we propose an efficient algorithm to efficiently simulate the drawdown stopping time and the associated maximum at this time. The method is straightforward and fast to implement, and avoids simulating sample paths thus eliminating discretisation bias. We show how the simulation algorithm is useful for pricing more complicated derivatives such as multiple drawdown options.     

On some functionals of the first passage times in jump models of stochastic volatility

Abstract

We compute some functionals related to the generalized joint Laplace transforms of the first times at which two-dimensional jump processes exit half strips. It is assumed that the state space components are driven by Cox processes with both independent and common (positive) exponential jump components. The method of proof is based on the solutions of the equivalent partial integro-differential boundary-value problems for the associated value functions. The results are illustrated on several two-dimensional jump models of stochastic volatility which are based on non-affine analogs of certain mean-reverting or diverting diffusion processes representing closed-form solutions of the appropriate stochastic differential equations.     

Optimal Double Stopping Problems for Maxima and Minima of Geometric Brownian Motions

Methodology and Computing in Applied Probability - We present closed-form solutions to some double optimal stopping problems with payoffs representing linear functions of the running maxima and...     

Optimal Stopping Problems in Lévy Models with Random Observations

In the standard optimal stopping problems, actions are artificially restricted to the moments of observations of costs or benefits. In the standard experimentation and learning models based on two-armed Poisson bandits, it is possible to take an action between two sequential observations. The latter models do not recognize the fact that timing decisions depend not only on the rate of arrival of observations, but also on the stochastic dynamics of costs or benefits. We combine these two strands of literature and consider optimal stopping problems with random observations and updating. We formulate the dichotomy principle, an extension of the smooth pasting principle.

     

Martingale solutions for the three-dimensional stochastic nonhomogeneous incompressible Navier–Stokes equations driven by Lévy processes

In this paper, the three-dimensional stochastic nonhomogeneous incompressible Navier–Stokes equations driven by Lévy processes consisting of the Brownian motion, the compensated Poisson random measure and the Poisson random measure are considered in a bounded domain. We obtain the existence of martingale solutions. The construction of the solution is based on the classical Galerkin approximation method, the stopping times, the stochastic compactness method and the Jakubowski–Skorokhod theorem.     

Stopping Problems of Certain Multiplicative Functionals and Optimal Investment with Transaction Costs

Optimal stopping and impulse control problems with certain multiplicative functionals are considered. The stopping problems are solved by showing the unique existence of the solutions of relevant variational inequalities. However, since functions defining the multiplicative costs change the signs, some difficulties arise in solving the variational inequalities. Through gauge transformation we rewrite the variational inequalities in different forms with the obstacles which grow exponentially fast but with positive killing rates. Through the analysis of such variational inequalities we construct optimal stopping times for the problems. Then optimal strategies for impulse control problems on the infinite time horizon with multiplicative cost functionals are constructed from the solutions of the risk-sensitive variational inequalities of "ergodic type" as well. Application to optimal investment with fixed ratio transaction costs is also considered.     

Convexity of the optimal stopping boundary for the American put option

We show that the optimal stopping boundary for the American put option is convex in the standard Black-Scholes model. The methods are adapted from ice-melting problems and rely upon studying the behavior of level curves of solutions to certain parabolic differential equations.     

Nonlinear Wave Equations in Infinite Waveguides

Abstract

We present sharp decay rates as time tends to infinity for solutions to linear Kleinc-Gordon and wave equations in domains with infinite boundaries like infinite waveguides, as well as the global well-posedness and the asymptotics for small data for the solutions to the associated nonlinear initial-boundary value problems.     

Estimates for the diameter of a martingale

We establish sharp weak type and logarithmic estimates for the diameter of the stopped Brownian motion. Then, using standard embedding theorems, we extend the results to the case of general real-valued continuous-path martingales. The proof rests on finding of the solutions to the corresponding three-dimensional optimal stopping problems.     

Resolutive ideal boundaries of nonlinear resistive networks

In this paper, we deal with nonlinear resistive networks in the framework of modular sequence spaces, introduced by De Michele and Soardi. We consider ideal boundaries of a network and investigate Dirichlet boundary value problems for solutions of Poisson equations.

     

Optimal valuation of American callable credit default swaps under drawdown of Lévy insurance risk process

This paper discusses the valuation of credit default swaps, where default is announced when the reference asset price has gone below certain level from the last record maximum, also known as the high-water mark or drawdown. We assume that the protection buyer pays premium at a fixed rate when the asset price is above a pre-specified level and continuously pays whenever the price increases. This payment scheme is in favour of the buyer as she only pays the premium when the market is in good condition for the protection against financial downturn. Under this framework, we look at an embedded option which gives the issuer an opportunity to call back the contract to a new one with reduced premium payment rate and slightly lower default coverage subject to paying a certain cost. We assume that the buyer is risk neutral investor trying to maximize the expected monetary value of the option over a class of stopping time. We discuss optimal solution to the stopping problem when the source of uncertainty of the asset price is modelled by Lévy process with only downward jumps. Using recent development in excursion theory of Lévy process, the results are given explicitly in terms of scale function of the Lévy process. Furthermore, the value function of the stopping problem is shown to satisfy continuous and smooth pasting conditions regardless of regularity of the sample paths of the Lévy process. Optimality and uniqueness of the solution are established using martingale approach for drawdown process and convexity of the scale function under Esscher transform of measure. Some numerical examples are discussed to illustrate the main results.     

Reflected BSDEs and robust optimal stopping for dynamic risk measures with jumps

We study the optimal stopping problem for dynamic risk measures represented by Backward Stochastic Differential Equations (BSDEs) with jumps and its relation with reflected BSDEs (RBSDEs). The financial position is given by an RCLL adapted process. We first state some properties of RBSDEs with jumps when the obstacle process is RCLL only. We then prove that the value function of the optimal stopping problem is characterized as the solution of an RBSDE. The existence of optimal stopping times is obtained when the obstacle is left-upper semi-continuous along stopping times. Finally, we investigate robust optimal stopping problems related to the case with model ambiguity and their links with mixed control/optimal stopping game problems. We prove that, under some hypothesis, the value function is equal to the solution of an RBSDE. We then study the existence of saddle points when the obstacle is left-upper semi-continuous along stopping times.     

Applications of maximum principles to dynamic equations on time scales

We apply the strong maximum principle to obtain a priori bounds and uniqueness of solutions for some initial value and boundary value problems as well as to establish oscillation results for second-order dynamic equations on time scales. Our comparison, uniqueness, and oscillation results are new and are extensions of results for ordinary differential equations to the times scale setting.     

A stochastic partially reversible investment problem on a finite time-horizon: Free-boundary analysis

We study a continuous-time, finite horizon, stochastic partially reversible investment problem for a firm producing a single good in a market with frictions. The production capacity is modeled as a one-dimensional, time-homogeneous, linear diffusion controlled by a bounded variation process which represents the cumulative investment–disinvestment strategy. We associate to the investment–disinvestment problem a zero-sum optimal stopping game and characterize its value function through a free-boundary problem with two moving boundaries. These are continuous, bounded and monotone curves that solve a system of non-linear integral equations of Volterra type. The optimal investment–disinvestment strategy is then shown to be a diffusion reflected at the two boundaries.     

On Finite-Difference Approximations for Normalized Bellman Equations

A class of stochastic optimal control problems involving optimal stopping is considered. Methods of Krylov (Appl. Math. Optim. 52(3):365–399, 2005) are adapted to investigate the numerical solutions of the corresponding normalized Bellman equations and to estimate the rate of convergence of finite difference approximations for the optimal reward functions.