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
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
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