A Class of Solvable Optimal Stopping Problems of Spectrally Negative Jump Diffusions

Luis Alvarez and Teppo A. Rakkolainen ()
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Teppo A. Rakkolainen: Department of Economics, Turku School of Economics

No 9, Discussion Papers from Aboa Centre for Economics

Abstract: We consider the optimal stopping of a class of spectrally negative jump diffusions. We state a set of conditions under which the value is shown to have a representation in terms of an ordinary nonlinear programming problem. We establish a connection between the considered problem and a stopping problem of an associated continuous diffusion process and demonstrate how this connection may be applied for characterizing the stopping policy and its value. We also establish a set of typically satisfied conditions under which increased volatility as well as higher jump-intensity decelerates rational exercise by increasing the value and expanding the continuation region.

Keywords: jump diffusions; optimal stopping; nonlinear programming; perpetual American options (search for similar items in EconPapers)
JEL-codes: C61 G11 G12 (search for similar items in EconPapers)
Pages: 46
Date: 2006-10
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Citations: View citations in EconPapers (4)

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Related works:
Working Paper: A Class of Solvable Optimal Stopping Problems of Spectrally Negative Jump Diffusions (2013)
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