2006-09-11Buch DOI: 10.18452/3987
Discounted Optimal Stopping for Maxima in Diffusion Models with Finite Horizon
Gapeev, Pavel V.
We present a solution to some discounted optimal stopping problem for the maximum of a geometric Brownian motion on a finite time interval. The method of proof is based on reducing the initial optimal stopping problem with the continuation region determined by an increasing continuous boundary surface to a parabolic free-boundary problem. Using the change-of-variable formula with local time on surfaces we show that the optimal boundary can be characterized as a unique solution of a nonlinear integral equation. The result can be interpreted as pricing American fixed-strike lookback option in a diffusion model with finite time horizon.
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Is Part Of Series: Sonderforschungsbereich 649: Ökonomisches Risiko - 57, SFB 649 Papers, ISSN:1860-5664