Optimal expulsion and optimal confinement of a Brownian particle with a switching cost

Robert C. Dalang and Laura Vinckenbosch

Stochastic Processes and their Applications, 2014, vol. 124, issue 12, 4050-4079

Abstract: We solve two stochastic control problems in which a player tries to minimize or maximize the exit time from an interval of a Brownian particle, by controlling its drift. The player can change from one drift to another but is subject to a switching cost. In each problem, the value function is written as the solution of a free boundary problem involving second order ordinary differential equations, in which the unknown boundaries are found by applying the principle of smooth fit. For both problems, we compute the value function, we exhibit the optimal strategy and we prove its generic uniqueness.

Keywords: Stochastic control with switching cost; Principle of smooth fit; Free boundary problems; Martingale method (search for similar items in EconPapers)
Date: 2014
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DOI: 10.1016/j.spa.2014.07.016

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