Optimal Switching under Ambiguity and Its Applications in Finance

Yuki Shigeta

Discussion papers from Graduate School of Economics , Kyoto University

Abstract: In this paper, we study optimal switching problems under ambiguity. To characterize the optimal switching under ambiguity in the finite horizon, we use multidimensional reflected backward stochastic differential equations (multidimensional RBSDEs) and show that a value function of the optimal switching under ambiguity coincides with a solutions to multidimensional RBSDEs with allowing negative switching costs. Furthermore, we naturally extend the finite horizon problem to the infinite horizon problem. In some applications, we show that ambiguity affects an optimal switching strategy with the different way to a usual switching problem without ambiguity.

Keywords: Optimal Switching; Ambiguity Aversion; Reflected Backward Stochastic Differential Equation; Viscosity Solution. (search for similar items in EconPapers)
Pages: 60
Date: 2016-07
New Economics Papers: this item is included in nep-ger and nep-upt
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http://www.econ.kyoto-u.ac.jp/dp/papers/e-16-005.pdf (application/pdf)

Related works:
Working Paper: Optimal Switching under Ambiguity and Its Applications in Finance (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:kue:epaper:e-16-005

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