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Solving optimal stopping problems of linear diffusions by applying convolution approximations

Solving optimal stopping problems of linear diffusions by applying convolution approximations We study how the convolution approximation of continuous mappings can be applied in solving optimal stopping problems of linear diffusions whenever the underlying payoff is not differentiable and the smooth fit principle does not necessarily apply. We construct a sequence of smooth reward functions converging uniformly on compacts to the original reward and, consequently, we derive a sequence of continuously differentiable (i.e. satisfying the smooth fit principle) value functions converging to the value of the original stopping problem. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Mathematical Methods of Operations Research Springer Journals

Solving optimal stopping problems of linear diffusions by applying convolution approximations

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Publisher
Springer Journals
Copyright
Copyright © 2001 by Springer-Verlag Berlin Heidelberg
Subject
Mathematics; Calculus of Variations and Optimal Control; Optimization; Operation Research/Decision Theory; Business and Management, general
ISSN
1432-2994
eISSN
1432-5217
DOI
10.1007/s001860000098
Publisher site
See Article on Publisher Site

Abstract

We study how the convolution approximation of continuous mappings can be applied in solving optimal stopping problems of linear diffusions whenever the underlying payoff is not differentiable and the smooth fit principle does not necessarily apply. We construct a sequence of smooth reward functions converging uniformly on compacts to the original reward and, consequently, we derive a sequence of continuously differentiable (i.e. satisfying the smooth fit principle) value functions converging to the value of the original stopping problem.

Journal

Mathematical Methods of Operations ResearchSpringer Journals

Published: Apr 5, 2001

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