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Explicit solutions in one-sided optimal stopping problems for one-dimensional diffusions

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Consider the optimal stopping problem of a one-dimensional diffusion with positive discount. Based on Dynkin's characterization of the value as the minimal excessive majorant of the reward and considering its Riesz representation, we give an explicit equation to find the optimal stopping threshold for problems with one-sided stopping regions, and an explicit formula for the value function of the problem. This representation also gives light on the validity of the smooth-fit (SF) principle. The results are illustrated by solving some classical problems, and also through the solution of: optimal stopping of the skew Brownian motion and optimal stopping of the sticky Brownian motion, including cases in which the SF principle fails.
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Keywords: 60G40; 62L15; diffusion processes; explicit solutions; optimal stopping

Document Type: Research Article

Affiliations: Facultad de Ciencias, Centro de Matemática, Universidad de la República, Iguá 4225, Montevideo, Uruguay

Publication date: May 4, 2014

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