Optimal switching decisions under stochastic volatility with fast mean reversion

Andrianos Tsekrekos and Athanasios N. Yannacopoulos

European Journal of Operational Research, 2016, vol. 251, issue 1, 148-157

Abstract: We study infinite-horizon, optimal switching problems for underlying processes that exhibiting “fast” mean-reverting stochastic volatility. We obtain closed-form analytic approximations of the solution for the resulting quasi-variational inequalities, that provide quantitative and qualitative results for the effects of multi-scale variability of the underlying process on the optimal switching rule. The proposed methodology is applicable to a number of operations research problems involving switching flexibility.

Keywords: Optimal switching problems; Multi-scale stochastic volatility; Quasi-variational inequalities; Hysteresis (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (13)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ejores:v:251:y:2016:i:1:p:148-157

DOI: 10.1016/j.ejor.2015.12.011

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