2017/11/24 by Masahiko Egami, Egami, Masahiko, Rusudan Kevkhishvili +1
Economics, Econometrics and Finance · #60G40 #60J60 #90C39 #90C40 #Capital Investment and Risk Analysis #Economic theories and models #FOS: Economics and business #Mathematical Finance (q-fin.MF) #Stochastic processes and financial applications
paper · pdf · doi:10.48550/arxiv.1711.08883
openalex publication_date 2017/11/24 · openalex created_date 2025/10/10 · openalex updated_date 2026/07/28
Pricing financial or real options with arbitrary payoffs in regime-switching models is an important problem in finance. Mathematically, it is to solve, under certain standard assumptions, a general form of optimal stopping problems in regime-switching models. In this article, we reduce an optimal stopping problem with an arbitrary value function in a two-regime environment to a pair of optimal stopping problems without regime switching. We then propose a method for finding optimal stopping rules using the techniques available for non-switching problems. In contrast to other methods, our systematic solution procedure is more direct since we first obtain the explicit form of the value functions. In the end, we discuss an option pricing problem which may not be dealt with by the conventional methods, demonstrating the simplicity of our approach.