Optimal Starting-Stopping and Switching of a CIR Process with Fixed Costs
Risk and Decision Analysis, Volume 5, Number 2-3, pp.149-161, 2014
20 Pages Posted: 1 Oct 2014 Last revised: 31 Dec 2017
Date Written: November 24, 2014
This paper analyzes the problem of starting and stopping a Cox-Ingersoll-Ross (CIR) process with fixed costs. In addition, we also study a related optimal switching problem that involves an infinite sequence of starts and stops. We establish the conditions under which the starting-stopping and switching problems admit the same optimal starting and/or stopping strategies. We rigorously prove that the optimal starting and stopping strategies are of threshold type, and give the analytical expressions for the value functions in terms of confluent hypergeometric functions. Numerical examples are provided to illustrate the dependence of timing strategies on model parameters and transaction costs.
Keywords: optimal starting-stopping, optimal switching, CIR process, confluent hypergeometric functions
JEL Classification: C41, G11, G12
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