Abstract
AbstractWe study the problem of stopping a Brownian bridgeXin order to maximise the expected value of an exponential gain function. The problem was posed by Ernst and Shepp (2015), and was motivated by bond selling with non-negative prices.Due to the non-linear structure of the exponential gain, we cannot rely on methods used in the literature to find closed-form solutions to other problems involving the Brownian bridge. Instead, we must deal directly with a stopping problem for a time-inhomogeneous diffusion. We develop techniques based on pathwise properties of the Brownian bridge and martingale methods of optimal stopping theory, which allow us to find the optimal stopping rule and to show the regularity of the value function.
Publisher
Cambridge University Press (CUP)
Subject
Statistics, Probability and Uncertainty,General Mathematics,Statistics and Probability
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