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Corrected random walk approximations to free boundary problems in optimal stopping

Published online by Cambridge University Press:  01 July 2016

Tze Leung Lai*
Affiliation:
Stanford University
Yi-Ching Yao*
Affiliation:
Academia Sinica
Farid Aitsahlia*
Affiliation:
University of Florida
*
Postal address: Department of Statistics, Stanford University, Stanford, CA 94305, USA. Email address: [email protected]
∗∗ Postal address: Institute of Statistical Science, Academia Sinica, Taipei 115, Taiwan, ROC. Email address: [email protected]
∗∗∗ Postal address: Department of Industrial and Systems Engineering, University of Florida, PO Box 116595, Gainesville, FL 32611-6595, USA. Email address: [email protected]
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Abstract

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Corrected random walk approximations to continuous-time optimal stopping boundaries for Brownian motion, first introduced by Chernoff and Petkau, have provided powerful computational tools in option pricing and sequential analysis. This paper develops the theory of these second-order approximations and describes some new applications.

Type
General Applied Probability
Copyright
Copyright © Applied Probability Trust 2007 

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