On a Monotone Dynamic Approach to Optimal Stopping Problems for Continuous-Time Markov Chains

Laurent Miclo (1, 2) , Stéphane Villeneuve (2)

1 IMT - Institut de Mathématiques de Toulouse UMR5219
2 TSE-R - Toulouse School of Economics

This paper is concerned with the solution of the optimal stopping problem associated to the valuation of Perpetual American options driven by continuous time Markov chains. We introduce a new dynamic approach for the numerical pricing of this type of American options where the main idea is to build a monotone sequence of almost excessive functions that are associated to hitting times of explicit sets. Under minimal assumptions about the payoff and the Markov chain, we prove that the value function of an American option is characterized by the limit of this monotone sequence.

Mots clés: Markov chains; Optimal Stopping; American option pricing

Domaines: Probabilités [math.PR]

Laurent Miclo, Stéphane Villeneuve. On a Monotone Dynamic Approach to Optimal Stopping Problems for Continuous-Time Markov Chains. 2019. ⟨hal-02105339⟩