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Optimal stopping with dynamic variational preferences

Engelage Daniel

Journal of Economic Theory, 2011, vol. 146, issue 5, 2042-2074

Abstract: We solve optimal stopping problems in uncertain environments for agents assessing utility by virtue of dynamic variational preferences as in Maccheroni, Marinacci and Rustichini (2006) [16] or, equivalently, assessing risk in terms of dynamic convex risk measures as in Cheridito, Delbaen and Kupper (2006) [4]. The solution is achieved by generalizing the approach in Riedel (2009) [21] introducing the concept of variational supermartingales and variational Snell envelopes with an accompanying theory. To illustrate results, we consider prominent examples: dynamic multiplier preferences and a dynamic version of generalized average value at risk introduced in Cheridito and Tianhui (2009) [5].

Keywords: Optimal; stopping; Uncertainty; aversion; Dynamic; variational; preferences; Dynamic; convex; risk; measures; Dynamic; penalty; Time; consistency; Multiplier; preferences; Entropic; risk; Average; value; at; risk (search for similar items in EconPapers)
Date: 2011
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Handle: RePEc:eee:jetheo:v:146:y:2011:i:5:p:2042-2074