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The shape of the value function under Poisson optimal stopping

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  • Hobson, David

Abstract

In a classical problem for the stopping of a diffusion process (Xt)t≥0, where the goal is to maximise the expected discounted value of a function of the stopped process Ex[e−βτg(Xτ)], maximisation takes place over all stopping times τ. In a Poisson optimal stopping problem, stopping is restricted to event times of an independent Poisson process. In this article we consider whether the resulting value function Vθ(x)=supτ∈T(Tθ)Ex[e−βτg(Xτ)] (where the supremum is taken over stopping times taking values in the event times of an inhomogeneous Poisson process with rate θ=(θ(Xt))t≥0) inherits monotonicity and convexity properties from g. It turns out that monotonicity (respectively convexity) of Vθ in x depends on the monotonicity (respectively convexity) of the quantity θ(x)g(x)θ(x)+β rather than g. Our main technique is stochastic coupling.

Suggested Citation

  • Hobson, David, 2021. "The shape of the value function under Poisson optimal stopping," Stochastic Processes and their Applications, Elsevier, vol. 133(C), pages 229-246.
  • Handle: RePEc:eee:spapps:v:133:y:2021:i:c:p:229-246
    DOI: 10.1016/j.spa.2020.12.001
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    References listed on IDEAS

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    1. Robert C. Merton, 2005. "Theory of rational option pricing," World Scientific Book Chapters, in: Sudipto Bhattacharya & George M Constantinides (ed.), Theory Of Valuation, chapter 8, pages 229-288, World Scientific Publishing Co. Pte. Ltd..
    2. Lange, Rutger-Jan & Ralph, Daniel & Støre, Kristian, 2020. "Real-Option Valuation in Multiple Dimensions Using Poisson Optional Stopping Times," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 55(2), pages 653-677, March.
    3. Cox, John C. & Ross, Stephen A., 1976. "The valuation of options for alternative stochastic processes," Journal of Financial Economics, Elsevier, vol. 3(1-2), pages 145-166.
    4. Dayanik, Savas & Karatzas, Ioannis, 2003. "On the optimal stopping problem for one-dimensional diffusions," Stochastic Processes and their Applications, Elsevier, vol. 107(2), pages 173-212, October.
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    Cited by:

    1. David Hobson & Gechun Liang & Edward Wang, 2021. "Callable convertible bonds under liquidity constraints and hybrid priorities," Papers 2111.02554, arXiv.org, revised Oct 2024.
    2. Alessandro Milazzo, 2024. "On the Monotonicity of the Stopping Boundary for Time-Inhomogeneous Optimal Stopping Problems," Journal of Optimization Theory and Applications, Springer, vol. 203(1), pages 336-358, October.
    3. Alvarez E., Luis H.R. & Lempa, Jukka & Saarinen, Harto & Sillanpää, Wiljami, 2024. "Solutions for Poissonian stopping problems of linear diffusions via extremal processes," Stochastic Processes and their Applications, Elsevier, vol. 172(C).
    4. Takuji Arai & Masahiko Takenaka, 2022. "Constrained optimal stopping under a regime-switching model," Papers 2204.07914, arXiv.org.

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