Optimal stopping for the exponential of a Brownian bridge

Tiziano De Angelis and Alessandro Milazzo

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Abstract: In this paper we study the problem of stopping a Brownian bridge $X$ in order to maximise the expected value of an exponential gain function. In particular, we solve the stopping problem $$\sup_{0\le \tau\le 1}\mathsf{E}[\mathrm{e}^{X_\tau}]$$ which was posed by Ernst and Shepp in their paper [Commun. Stoch. Anal., 9 (3), 2015, pp. 419--423] and was motivated by bond selling with non-negative prices. Due to the non-linear structure of the exponential gain, we cannot rely on methods used in the literature to find closed-form solutions to other problems involving the Brownian bridge. Instead, we develop techniques that use pathwise properties of the Brownian bridge and martingale methods of optimal stopping theory in order to find the optimal stopping rule and to show regularity of the value function.

Date: 2019-03, Revised 2019-11
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Citations: View citations in EconPapers (1)

Published in J. Appl. Probab. 57 (2020) 361-384

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Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:1904.00075

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