Optimal switching decisions under stochastic volatility with fast mean reversion
•Study optimal switching problems under “fast” mean-reverting stochastic volatility.•Derive closed-form approximations of the full problem via homogenization theory.•Apply our general solution to well-known switching problems and volatility models.•Proposed method is of interest to applied problems...
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| Published in: | European journal of operational research Vol. 251; no. 1; pp. 148 - 157 |
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| Main Authors: | , |
| Format: | Journal Article |
| Language: | English |
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Amsterdam
Elsevier B.V
16-05-2016
Elsevier Sequoia S.A |
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| Abstract | •Study optimal switching problems under “fast” mean-reverting stochastic volatility.•Derive closed-form approximations of the full problem via homogenization theory.•Apply our general solution to well-known switching problems and volatility models.•Proposed method is of interest to applied problems involving switching flexibility.
We study infinite-horizon, optimal switching problems for underlying processes that exhibiting “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. |
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| AbstractList | •Study optimal switching problems under “fast” mean-reverting stochastic volatility.•Derive closed-form approximations of the full problem via homogenization theory.•Apply our general solution to well-known switching problems and volatility models.•Proposed method is of interest to applied problems involving switching flexibility.
We study infinite-horizon, optimal switching problems for underlying processes that exhibiting “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. We study infinite-horizon, optimal switching problems for underlying processes that exhibiting "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. |
| Author | Yannacopoulos, Athanasios N. Tsekrekos, Andrianos E. |
| Author_xml | – sequence: 1 givenname: Andrianos E. surname: Tsekrekos fullname: Tsekrekos, Andrianos E. email: tsekrekos@aueb.gr organization: Department of Accounting & Finance, Athens University of Economics & Business, Greece – sequence: 2 givenname: Athanasios N. surname: Yannacopoulos fullname: Yannacopoulos, Athanasios N. email: ayannaco@aueb.gr organization: Department of Statistics, Athens University of Economics & Business, Greece |
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| Keywords | Optimal switching problems Multi-scale stochastic volatility Hysteresis Quasi-variational inequalities |
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| Snippet | •Study optimal switching problems under “fast” mean-reverting stochastic volatility.•Derive closed-form approximations of the full problem via homogenization... We study infinite-horizon, optimal switching problems for underlying processes that exhibiting "fast" mean-reverting stochastic volatility. We obtain... |
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| SubjectTerms | Approximation Decision analysis Flexibility Hysteresis Inequalities Mathematical analysis Mathematical problems Multi-scale stochastic volatility Operations research Optimal switching problems Optimization Quasi-variational inequalities Stochastic models Stochasticity Studies Switching Volatility |
| Title | Optimal switching decisions under stochastic volatility with fast mean reversion |
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