Closed-form solutions to stochastic process switching problems

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.


Published in:
Journal of Mathematical Economics, 44, 11, 1072-1083
Year:
2008
Publisher:
Elsevier
ISSN:
0304-4068
Keywords:
Laboratories:




 Record created 2013-08-14, last modified 2018-01-28


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