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Optimal Switching under Ambiguity and Its Applications in Finance

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  • Yuki Shigeta

Abstract

In this paper, we study optimal switching problems under ambiguity. To characterize the optimal switching under ambiguity in the finite horizon, we use multidimensional reflected backward stochastic differential equations (multidimensional RBSDEs) and show that a value function of the optimal switching under ambiguity coincides with a solutions to multidimensional RBSDEs with allowing negative switching costs. Furthermore, we naturally extend the finite horizon problem to the infinite horizon problem. In some applications, we show that ambiguity affects an optimal switching strategy with the different way to a usual switching problem without ambiguity.

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  • Yuki Shigeta, 2016. "Optimal Switching under Ambiguity and Its Applications in Finance," Discussion papers e-16-005, Graduate School of Economics , Kyoto University.
    • Handle: RePEc:kue:epaper:e-16-005
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    References listed on IDEAS

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    Keywords

    Optimal Switching; Ambiguity Aversion; Reflected Backward Stochastic Differential Equation; Viscosity Solution.;
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