A Markov-Modulated Stochastic Control Problem with Optimal Multiple Stopping with Application to Finance

Leung, Tim

Download This Paper

Open PDF in Browser

Add Paper to My Library

A Markov-Modulated Stochastic Control Problem with Optimal Multiple Stopping with Application to Finance

Proceedings of the 49th IEEE Conference on Decision and Control, 2010

8 Pages Posted: 23 Aug 2010 Last revised: 6 Feb 2015

See all articles by Tim Leung

Tim Leung

University of Washington - Department of Applied Math

Date Written: December 15, 2010

Abstract

This paper studies the valuation of multiple American options in an incomplete market where asset prices follow Markov-modulated dynamics. The holder’s optimal hedging and exercising strategies are determined from a utility maximization problem with optimal multiple stopping. We analyze the associated system of variational inequalities for the holder’s utility indifference price, and construct a duality formula involving relative entropy minimization over a random horizon.

Keywords: optimal multiple stopping, indifference pricing, regime switching, American options, entropy minimization

JEL Classification: G11, G12, G13, D91

Suggested Citation: Suggested Citation

Leung, Tim, A Markov-Modulated Stochastic Control Problem with Optimal Multiple Stopping with Application to Finance (December 15, 2010). Proceedings of the 49th IEEE Conference on Decision and Control, 2010, Available at SSRN: https://ssrn.com/abstract=1664056