A full balance sheet two-mode optimal switching problem
2015 (English)In: Stochastics: An International Journal of Probablitiy and Stochastic Processes, ISSN 1744-2508, E-ISSN 1744-2516, Vol. 87, no 4, 604-622 p.Article in journal (Refereed) Published
We formulate and solve a finite horizon full balance sheet of a two-mode optimal switching problem related to trade-off strategies between expected profit and cost yields. Given the current mode, this model allows for either a switch to the other mode or termination of the project, and this happens for both sides of the balance sheet. A novelty in this model is that the related obstacles are nonlinear in the underlying yields, whereas, they are linear in the standard optimal switching problem. The optimal switching problem is formulated in terms of a system of Snell envelopes for the profit and cost yields which act as obstacles to each other. We prove the existence of a continuous minimal solution of this system using an approximation scheme and fully characterize the optimal switching strategy.
Place, publisher, year, edition, pages
2015. Vol. 87, no 4, 604-622 p.
real options, backward SDEs, Snell envelope, stopping time, optimal switching, impulse control, balance sheet, merger and acquisition
Probability Theory and Statistics
IdentifiersURN: urn:nbn:se:kth:diva-173791DOI: 10.1080/17442508.2014.991324ISI: 000360395400004ScopusID: 2-s2.0-84939261133OAI: oai:DiVA.org:kth-173791DiVA: diva2:854885
QC 201509182015-09-182015-09-182015-09-18Bibliographically approved