An optimal stopping problem in a diffusion-type model with delay

Pavel V. Gapeev and Markus Reiss

No 2005-005, SFB 649 Discussion Papers from Humboldt University Berlin, Collaborative Research Center 649: Economic Risk

Abstract: We present an explicit solution to an optimal stopping problem in a model described by a stochastic delay differential equation with an exponential delay measure. The method of proof is based on reducing the initial problem to a free-boundary problem and solving the latter by means of the smooth-fit condition. The problem can be interpreted as pricing special perpetual average American put options in a diffusion-type model with delay.

Date: 2005
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Journal Article: An optimal stopping problem in a diffusion-type model with delay (2006)
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