CDAM: Computational, Discrete and Applicable Mathematics@LSE | |
CDAM Research Report, LSE-CDAM-2009-03May 2009 |
Discounted optimal stopping for diffusions: free-boundary versus martingale approach
Pavel V. Gapeev and Hans Rudolf Lerche
The free-boundary and the martingale approach are competitive methods of solving discounted optimal stopping problems for one-dimensional time-homogeneous regular dif- fusion processes on in nite time intervals. We provide a missing link showing the equiva- lence of these approaches for a problem, where the optimal stopping time is equal to the rst exit time of the underlying process from a region restricted by two constant bound- aries. We also consider several illustrating examples including the rational valuation of the perpetual American strangle option.A PDF file (189 kB) with the full contents of this report can be downloaded by clicking here.
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