An Analytic Recursive Method for Optimal Multiple Stopping: Canadization and Phase-Type Fitting
30 Pages Posted: 19 Apr 2014 Last revised: 28 Oct 2015
Date Written: May 28, 2015
We study an optimal multiple stopping problem driven by a spectrally negative Levy process. The stopping times are separated by constant refraction times, and the discount rate can be positive or negative. The computation involves a distribution of the Levy process at a constant horizon and hence the solutions in general cannot be attained analytically. Motivated by the maturity randomization (Canadization) technique by Carr (1998), we approximate the refraction times by i.i.d. Erlang random variables. In addition, fitting random jumps to phase-type distributions, our method involves repeated integrations with respect to the resolvent measure written in terms of the scale function of the underlying Levy process. We derive a recursive algorithm to compute the value function in closed form, and sequentially determine the optimal exercise thresholds. A series of numerical examples are provided to compare our analytic formula to results from Monte Carlo simulation.
Keywords: optimal multiple stopping, Levy process, maturity randomization, refraction times, phase-type fitting
JEL Classification: C60, C63
Suggested Citation: Suggested Citation