Loading...
research article
Closed-form solutions to stochastic 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.
Type
research article
Authors
Publication date
2008
Published in
Volume
44
Issue
11
Start page
1072
End page
1083
Peer reviewed
REVIEWED
EPFL units
Available on Infoscience
August 14, 2013
Use this identifier to reference this record