Title :
A Markov-modulated stochastic control problem with optimal multiple stopping with application to finance
Author :
Leung, Tim Siu-Tang
Author_Institution :
Dept. of Appl. Math. & Stat., Johns Hopkins Univ., Baltimore, MD, USA
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 :
Markov processes; entropy; minimisation; pricing; stochastic systems; variational techniques; American options; Markov-modulated dynamics; Markov-modulated stochastic control problem; asset prices; duality formula; exercising strategy; finance; optimal hedging; optimal multiple stopping; relative entropy minimization; utility indifference price; utility maximization problem; variational inequalities; Correlation; Entropy; Generators; Investments; Markov processes; Pricing;
Conference_Titel :
Decision and Control (CDC), 2010 49th IEEE Conference on
Conference_Location :
Atlanta, GA
Print_ISBN :
978-1-4244-7745-6
DOI :
10.1109/CDC.2010.5717052
