Optimal Switching Decisions Under Stochastic Volatility with Fast Mean Reversion

European Journal of Operational Research, Vol. 251, No. 1, pp. 148-157, 2016

26 Pages Posted: 26 Mar 2016

See all articles by Andrianos E. Tsekrekos

Andrianos E. Tsekrekos

Athens University of Economics and Business - Department of Accounting and Finance

A.N. Yannacopoulos

Athens University of Economics and Business

Date Written: November 29, 2015

Abstract

We study infinite-horizon, optimal switching problems for underlying processes that exhibit "fast" mean-reverting stochastic volatility. We obtain closed-form analytic approximations of the solution for the resulting quasi-variational inequalities, that provide quantitative and qualitative results for the effects of multi-scale variability of the underlying process on the optimal switching rule. The proposed methodology is applicable to a number of operations research problems involving switching flexibility.

Keywords: Optimal switching problems, Multi-scale stochastic volatility, Quasi-variational inequalities, Hysteresis

JEL Classification: C41, D81, G13

Suggested Citation

Tsekrekos, Andrianos E. and Yannacopoulos, Athanasios, Optimal Switching Decisions Under Stochastic Volatility with Fast Mean Reversion (November 29, 2015). European Journal of Operational Research, Vol. 251, No. 1, pp. 148-157, 2016, Available at SSRN: https://ssrn.com/abstract=2744616

Andrianos E. Tsekrekos

Athens University of Economics and Business - Department of Accounting and Finance ( email )

76 Patission Street
GR-104 34 Athens
Greece

Athanasios Yannacopoulos (Contact Author)

Athens University of Economics and Business ( email )

76 Patission Street
Athens, 104 34
Greece

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