Optimal Resource Extraction in Regime Switching L\'evy Markets

Moustapha Pemy

Papers from arXiv.org

Abstract: This paper studies the problem of optimally extracting nonrenewable natural resource in light of various financial and economic restrictions and constraints. Taking into account the fact that the market values of the main natural resources i.e. oil, natural gas, copper,...,etc, fluctuate randomly following global and seasonal macroeconomic parameters, these values are modeled using Markov switching L\'evy processes. We formulate this problem as finite-time horizon combined optimal stopping and optimal control problem. We prove that the value function is the unique viscosity solution of the corresponding Hamilton-Jacobi-Bellman equations. Moreover, we prove the convergence of a finite difference approximation of the value function. Numerical examples are presented to illustrate these results.

Date: 2016-06, Revised 2016-11
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Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:1606.03388

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