The Annals of Applied Probability

An explicit solution for an optimal stopping/optimal control problem which models an asset sale

Vicky Henderson and David Hobson

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Abstract

In this article we study an optimal stopping/optimal control problem which models the decision facing a risk-averse agent over when to sell an asset. The market is incomplete so that the asset exposure cannot be hedged. In addition to the decision over when to sell, the agent has to choose a control strategy which corresponds to a feasible wealth process.

We formulate this problem as one involving the choice of a stopping time and a martingale. We conjecture the form of the solution and verify that the candidate solution is equal to the value function.

The interesting features of the solution are that it is available in a very explicit form, that for some parameter values the optimal strategy is more sophisticated than might originally be expected, and that although the setup is based on continuous diffusions, the optimal martingale may involve a jump process.

One interpretation of the solution is that it is optimal for the risk-averse agent to gamble.

Article information

Source
Ann. Appl. Probab. Volume 18, Number 5 (2008), 1681-1705.

Dates
First available in Project Euclid: 30 October 2008

Permanent link to this document
https://projecteuclid.org/euclid.aoap/1225372946

Digital Object Identifier
doi:10.1214/07-AAP511

Mathematical Reviews number (MathSciNet)
MR2462545

Zentralblatt MATH identifier
1165.60021

Subjects
Primary: 60G40: Stopping times; optimal stopping problems; gambling theory [See also 62L15, 91A60] 91A60: Probabilistic games; gambling [See also 60G40]
Secondary: 60G44: Martingales with continuous parameter 91B28 93E20: Optimal stochastic control

Keywords
Optimal stopping singular control utility maximization incomplete market local time gambling

Citation

Henderson, Vicky; Hobson, David. An explicit solution for an optimal stopping/optimal control problem which models an asset sale. Ann. Appl. Probab. 18 (2008), no. 5, 1681--1705. doi:10.1214/07-AAP511. https://projecteuclid.org/euclid.aoap/1225372946.


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References

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