Corrected random walk approximations to free boundary problems in optimal stopping

Corrected random walk approximations to free boundary problems in optimal stopping

Tze Leung Lai, Yi-Ching Yao, and Farid Aitsahlia

Source: Adv. in Appl. Probab. Volume 39, Number 3 (2007), 753-775.

Abstract

Corrected random walk approximations to continuous-time optimal stopping boundaries for Brownian motion, first introduced by Chernoff and Petkau, have provided powerful computational tools in option pricing and sequential analysis. This paper develops the theory of these second-order approximations and describes some new applications.

Primary Subjects: 60G40

Secondary Subjects: 60H30, 90C39

Keywords: Optimal stopping; free boundary partial differential equation; random walk; renewal theory; singular stochastic control

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Links and Identifiers

Permanent link to this document: http://projecteuclid.org/euclid.aap/1189518637
Digital Object Identifier: doi:10.1239/aap/1189518637
Mathematical Reviews number (MathSciNet): MR2357380
Zentralblatt MATH identifier: 1127.60038

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