Optimal stopping of an Ornstein–Uhlenbeck bridge

A. Azze, D’Auria, B. and E. García-Portugués

Stochastic Processes and their Applications, 2024, vol. 172, issue C

Abstract: In this paper we make a rigorous analysis of the existence and characterization of the free boundary related to the optimal stopping problem that maximizes the mean of an Ornstein–Uhlenbeck bridge. The result includes the Brownian bridge problem as a limit case. The methodology hereby presented relies on a time–space transformation that casts the original problem into a more tractable one with an infinite horizon and a Brownian motion underneath. We comment on two different numerical algorithms to compute the free-boundary equation and discuss illustrative cases that shed light on the boundary’s shape. In particular, the free boundary generally does not share the monotonicity of the Brownian bridge case.

Keywords: Free-boundary problem; Optimal stopping; Ornstein–Uhlenbeck bridge; Time-inhomogeneity (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1016/j.spa.2024.104342

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