Time and Killed Resolvents in Reflected Optimal Stopping with a Max Payoff

Abstract

We study infinite-horizon optimal stopping for normally reflected two-dimensional diffusions in the positive quadrant with max payoff \(G(x_1,x_2)=x_1\veeαx_2\). The non-smooth payoff produces a singular stopping-gain measure on the kink set \(Δ=\{x_1=αx_2\}\). We prove $\displaystyle Γ^Δ(dx) = -\frac{n^\top a(x)n}{2\sqrt{1+α^2}}\,σ_Δ(dx)$, with $n=(1,-α)$, so the diagonal component is non-positive and strictly negative under local ellipticity. This implies that every interior kink point lies in the continuation region. We further show that the correct value representation uses the resolvent killed at first entry into the stopping set, $\displaystyle V=G-R_r^{\mathcal C}Γ$, and give a closed-form reflected Brownian counter-example showing that the unrestricted reflected resolvent is generally wrong. A reflected Brownian benchmark and numerical experiments illustrate the local-time, resolvent-gap, and diagonal-avoidance mechanisms.