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A Markov-modulated stochastic control problem with optimal multiple stopping with application to finance

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1 Author(s)
Tim Siu-Tang Leung ; Dept. of Applied Mathematics and Statistics, Johns Hopkins University, Baltimore MD 21218, USA

This paper studies the valuation of multiple American options in an incomplete market where asset prices follow Markov-modulated dynamics. The holder's optimal hedging and exercising strategies are determined from a utility maximization problem with optimal multiple stopping. We analyze the associated system of variational inequalities for the holder's utility indifference price, and construct a duality formula involving relative entropy minimization over a random horizon.

Published in:

49th IEEE Conference on Decision and Control (CDC)

Date of Conference:

15-17 Dec. 2010