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Solving finite time horizon Dynkin games by optimal switching

Published online by Cambridge University Press:  09 December 2016

Randall Martyr*
Affiliation:
The University of Manchester
*
* Current address: School of Mathematical Sciences, Queen Mary University of London, Mile End Road, London E1 4NS, UK. Email address: r.martyr@qmul.ac.uk
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Abstract

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This paper uses recent results on continuous-time finite-horizon optimal switching problems with negative switching costs to prove the existence of a saddle point in an optimal stopping (Dynkin) game. Sufficient conditions for the game's value to be continuous with respect to the time horizon are obtained using recent results on norm estimates for doubly reflected backward stochastic differential equations. This theory is then demonstrated numerically for the special cases of cancellable call and put options in a Black‒Scholes market.

Type
Research Papers
Copyright
Copyright © Applied Probability Trust 2016 

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