The Solution of Some Discretionary Stopping Problems
40 Pages Posted: 5 Apr 2014 Last revised: 18 Sep 2015
Date Written: September 15, 2015
We present a methodology for obtaining explicit solutions to infinite time horizon optimal stopping problems involving general, one-dimensional, Ito diffusions, payoff functions that need not be smooth and state-dependent discounting. This is done within a framework based on dynamic programming techniques employing variational inequalities. The aim of this paper is to facilitate the solution of a wide variety of problems, particularly in finance or economics.
Keywords: Stochastic Control, Optimal stopping, Dynamic programming, Finance
JEL Classification: C61, G13
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