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research article

Closed-form solutions to stochastic switching problems

François, Pascal
•
Morellec, Erwan  
2008
Journal of Mathematical Economics

This paper studies the price of an asset depending on both a fundamental and possible interventions of an authority. Using the martingale approach in continuous time, we provide closed-form solutions to switching problems involving irreversible, state dependent and intramarginal switch policies. The martingale approach provides additional information regarding the switching policy, namely the average time before authority intervention, the conditional probability of intervention, or the total time of intervention. Applications in international and financial economics include exchange rates modelling, corporate claims valuation and capital budgeting decisions.

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Type
research article
DOI
10.1016/j.jmateco.2007.09.002
Author(s)
François, Pascal
Morellec, Erwan  
Date Issued

2008

Published in
Journal of Mathematical Economics
Volume

44

Issue

11

Start page

1072

End page

1083

Subjects

Stochastic process switching

•

Irreversible switch

•

State-dependent switch

•

Infra-marginal switch

Editorial or Peer reviewed

REVIEWED

Written at

EPFL

EPFL units
SFI-EM  
Available on Infoscience
August 14, 2013
Use this identifier to reference this record
https://infoscience.epfl.ch/handle/20.500.14299/94134
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