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arXiv · 1401.6905

Infinite horizon stopping problems with (nearly) total reward criteria

Jan Palczewski·Lukasz Stettner
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Abstract

We study an infinite horizon optimal stopping problem which arises naturally in the optimal timing of a firm/project sale or in the valuation of natural resources: the functional to be maximised is a sum of a discounted running reward and a discounted final reward. The running and final rewards as well as the instantaneous interest rate (used for calculating discount factors) depend on a Feller-Markov process modelling the underlying randomness in the world, such as prices of stocks, prices of natural resources (gas, oil, etc.), or factors influencing the interest rate. For years, it had seemed sensible to assume that interest rates were uniformly separated from 0, which is needed for the existing theory to work. However, recent developments in Japan and in Europe showed that interest rates can get arbitrarily close to 0. In this paper we establish the feasibility of the stopping problem, prove the existence of optimal stopping times and a variational characterisation (in the viscosity sense) of the value function when interest rates are NOT uniformly separated from 0. Our results rely on certain ergodic properties of the underlying (non-uniformly) ergodic Markov process. We provide several criteria for diffusions and jump-diffusions.

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Jan Palczewski, Lukasz Stettner. 2014-01-27. Infinite horizon stopping problems with (nearly) total reward criteria. https://doi.org/10.1016/j.spa.2014.07.009

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