Optimal expulsion and optimal confinement of a Brownian particle with a switching cost

• Published in: Stochastic Processes And Their Applications (ISSN: 0304-4149), vol. 124, num. 12, p. 4050-4079
• Amsterdam: Elsevier Science Bv, 2014

We solve two stochastic control problems in which a player tries to minimize or maximize the exit time from an interval of a Brownian particle, by controlling its drift. The player can change from one drift to another but is subject to a switching cost. In each problem, the value function is written as the solution of a free boundary problem involving second order ordinary differential equations, in which the unknown boundaries are found by applying the principle of smooth fit. For both problems, we compute the value function, we exhibit the optimal strategy and we prove its generic uniqueness. (C) 2014 Elsevier B.V. All rights reserved.

Keywords: Stochastic control with switching cost ; Principle of smooth fit ; Free boundary problems ; Martingale method

Reference

• EPFL-ARTICLE-204016
• doi:10.1016/j.spa.2014.07.016
• View record in Web of Science

Record created on 2014-12-30, modified on 2017-05-12