A new integral equation for Brownian stopping problems with finite time horizon

Sören Christensen and Simon Fischer

Stochastic Processes and their Applications, 2023, vol. 162, issue C, 338-360

Abstract: For classical finite time horizon stopping problems driven by a Brownian motion V(t,x)=supt≤τ≤0E(t,x)[g(τ,Wτ)],we derive a new class of Fredholm type integral equations for the stopping set. For a large class of discounted problems, we show by analytical arguments that the equation uniquely characterizes the stopping boundary of the problem. Regardless of uniqueness, we use the representation to rigorously find the limit behavior of the stopping boundary close to the terminal time. Interestingly, it turns out that the leading-order coefficient is universal for wide classes of problems. We also discuss how the representation can be used for numerical purposes.

Keywords: Brownian motion; Optimal stopping; Finite time horizon; American option; Fredholm integral representation; Mixture of Gaussian random variables (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (1)

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DOI: 10.1016/j.spa.2023.05.004

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