Optimal stopping of expected profit and cost yields in an investment under uncertainty

Boualem Djehiche, Said Hamad\`ene and Marie Am\'elie Morlais
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Said Hamad\`ene: LMM
Marie Am\'elie Morlais: LMM

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Abstract: We consider a finite horizon optimal stopping problem related to trade-off strategies between expected profit and cost cash-flows of an investment under uncertainty. The optimal problem is first formulated in terms of a system of Snell envelopes for the profit and cost yields which act as obstacles to each other. We then construct both a minimal and a maximal solutions using an approximation scheme of the associated system of reflected backward SDEs. When the dependence of the cash-flows on the sources of uncertainty, such as fluctuation market prices, assumed to evolve according to a diffusion process, is made explicit, we also obtain a connection between these solutions and viscosity solutions of a system of variational inequalities (VI) with interconnected obstacles. We also provide two counter-examples showing that uniqueness of solutions of (VI) does not hold in general.

Date: 2010-01
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