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

fYear

2010

fDate

15-17 Dec. 2010

Firstpage

559

Lastpage

566

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;

fLanguage

English

Publisher

ieee

Conference_Titel

Decision and Control (CDC), 2010 49th IEEE Conference on

Conference_Location

Atlanta, GA

ISSN

0743-1546

Print_ISBN

978-1-4244-7745-6

Type

conf

DOI

10.1109/CDC.2010.5717052

Filename

5717052

Link To Document

https://search.isc.ac/dl/search/defaultta.aspx?DTC=49&DC=2565736