Optimal Retirement Under Partial Information

Author(s):  
Kexin Chen ◽  
Junkee Jeon ◽  
Hoi Ying Wong

The optimal retirement decision is an optimal stopping problem when retirement is irreversible. We investigate the optimal consumption, investment, and retirement decisions when the mean return of a risky asset is unobservable and is estimated by filtering from historical prices. To ensure nonnegativity of the consumption rate and the borrowing constraints on the wealth process of the representative agent, we conduct our analysis using a duality approach. We link the dual problem to American option pricing with stochastic volatility and prove that the duality gap is closed. We then apply our theory to a hidden Markov model for regime-switching mean return with Bayesian learning. We fully characterize the existence and uniqueness of variational inequality in the dual optimal stopping problem, as well as the free boundary of the problem. An asymptotic closed-form solution is derived for optimal retirement timing by small-scale perturbation. We discuss the potential applications of the results to other partial-information settings.

2021 ◽  
Vol 2021 ◽  
pp. 1-20
Author(s):  
Xiankang Luo ◽  
Jie Xing

This study investigates valuation of guaranteed minimum maturity benefits (GMMB) in variable annuity contract in the case where the guarantees can be surrendered at any time prior to the maturity. In the event of the option being exercised early, early surrender charges will be applied. We model the underlying mutual fund dynamics under regime-switching volatility. The valuation problem can be reduced to an American option pricing problem, which is essentially an optimal stopping problem. Then, we obtain the pricing partial differential equation by a standard Markovian argument. A detailed discussion shows that the solution of the problem involves an optimal surrender boundary. The properties of the optimal surrender boundary are given. The regime-switching Volterra-type integral equation of the optimal surrender boundary is derived by probabilistic methods. Furthermore, a sensitivity analysis is performed for the optimal surrender decision. In the end, we adopt the trinomial tree method to determine the optimal strategy.


2015 ◽  
Vol 02 (01) ◽  
pp. 1550004 ◽  
Author(s):  
Tim Leung ◽  
Yoshihiro Shirai

This paper studies the risk-adjusted optimal timing to liquidate an option at the prevailing market price. In addition to maximizing the expected discounted return from option sale, we incorporate a path-dependent risk penalty based on shortfall or quadratic variation of the option price up to the liquidation time. We establish the conditions under which it is optimal to immediately liquidate or hold the option position through expiration. Furthermore, we study the variational inequality associated with the optimal stopping problem, and prove the existence and uniqueness of a strong solution. A series of analytical and numerical results are provided to illustrate the nontrivial optimal liquidation strategies under geometric Brownian motion (GBM) and exponential Ornstein–Uhlenbeck models. We examine the combined effects of price dynamics and risk penalty on the sell and delay regions for various options. In addition, we obtain an explicit closed-form solution for the liquidation of a stock with quadratic penalty under the GBM model.


2001 ◽  
Vol 38 (2) ◽  
pp. 464-481 ◽  
Author(s):  
Xin Guo

We investigate an optimal stopping time problem which arises from pricing Russian options (i.e. perpetual look-back options) on a stock whose price fluctuations are modelled by adjoining a hidden Markov process to the classical Black-Scholes geometric Brownian motion model. By extending the technique of smooth fit to allow jump discontinuities, we obtain an explicit closed-form solution. It gives a non-standard application of the well-known smooth fit principle where the optimal strategy involves jumping over the optimal boundary and by an arbitrary overshoot. Based on the optimal stopping analysis, an arbitrage-free price for Russian options under the hidden Markov model is derived.


2001 ◽  
Vol 38 (02) ◽  
pp. 464-481 ◽  
Author(s):  
Xin Guo

We investigate an optimal stopping time problem which arises from pricing Russian options (i.e. perpetual look-back options) on a stock whose price fluctuations are modelled by adjoining a hidden Markov process to the classical Black-Scholes geometric Brownian motion model. By extending the technique of smooth fit to allow jump discontinuities, we obtain an explicit closed-form solution. It gives a non-standard application of the well-known smooth fit principle where the optimal strategy involves jumping over the optimal boundary and by an arbitrary overshoot. Based on the optimal stopping analysis, an arbitrage-free price for Russian options under the hidden Markov model is derived.


2012 ◽  
Vol 15 (05) ◽  
pp. 1250037 ◽  
Author(s):  
ALESSANDRO RAMPONI

In this paper we consider a jump-diffusion dynamic whose parameters are driven by a continuous time and stationary Markov Chain on a finite state space as a model for the underlying of European contingent claims. For this class of processes we firstly outline the Fourier transform method both in log-price and log-strike to efficiently calculate the value of various types of options and as a concrete example of application, we present some numerical results within a two-state regime switching version of the Merton jump-diffusion model. Then we develop a closed-form solution to the problem of pricing a Forward Starting Option and use this result to approximate the value of such a derivative in a general stochastic volatility framework.


Author(s):  
С.В. Посыпанов

Технологии, связанные с формированием двухярусных пакетных сплоточных единиц, перспективны при организации транспорта лесоматериалов по средним и малым рекам. Также они могут быть интересны лесозаготовителям, для которых приобретение специализированной сплоточной техники нецелесообразно или невозможно. Для обеспечения возможности выполнения технологических и прочностных расчетов, связанных с указанными единицами, необходимы сведения о взаимозависимостях их геометрических характеристик. Для получения нужной информации использовали эластиковую теорию. При этом пакеты, составляющие сплоточную единицу, представляли как гибкие невесомые оболочки, заполненные сыпучими средами, находящимися под воздействием сил тяжести и Архимеда. Обвязки нижних пакетов рассматривали как бесперегибные эластики второго рода, обвязки верхних – как комбинации фрагментов двух таких эластик: подводной и надводной. Используя параметрические уравнения указанных кривых, получили замкнутую систему уравнений, отражающих зависимости искомых геометрических характеристик от модулярных углов, параметров эластик и модулярных высот, измерение которых на практике проблематично. Из-за присутствия в системе эллиптических интегралов ее аналитическое решение, обеспечивающее возможность выражения одних общепринятых характеристик через другие используемые на практике параметры оказалось невозможным. Предложили свой алгоритм численного решения системы, реализовали его на компьютере, выполнили соответствующие расчеты. При этом задача была сведена к безразмерному виду с целью уменьшения объема вычислений и обеспечения универсальности их результатов. Опираясь на материалы ранее проведенных исследований, связали значения вычисленных характеристик рассматриваемой сплоточной единицы с соответствующими геометрическими параметрами отдельных пакетов, составляющих ее, при нахождении их на суше или наплаву. Используя результаты выполненных вычислений, получили аппроксимирующие зависимости для сравнительно простого определения искомых геометрических характеристик при практических расчетах и дальнейших научных исследованиях. Установили характер и степень влияния определяющих факторов на указанные характеристики. Достоверность результатов теоретических исследований подтвердили в ходе экспериментальной проверки на моделях. Technologies of forming ofbilevel packaged rafting units are perspective for arrangement of transportation of forest products along the small and medium-scale rivers.Those technologies are potentially useful for small-scale loggers, who are not capable to purchase specialized equipment for rafts forming. The geometric and strength properties of the rafting units are necessary for implementation of relevant technological and strengthening estimations. In order to obtain required information, the elasticity theory was applied. The log packages were considered as flexible shell structures filled up with granular material, effected by gravity and Archimedes forces. The lower packages strappings were deemed as non-inflective second order elasticity, the upper ones – as combinations of fragments of underwater andoverwater elasticities. The circuit system of equations was developed to describe dependence of geometric elements on the elasticities parameters, modular angles and elevations, practical metering of which is problematic.The system contains the elliptical integrals, so the closed form solution was found impossible. The author’s algorithm of a numerical solution of the system is proposed and instrumented. Computations were carried outwithin the practical data span in adimensionless form. Based on the results of the previous studies, the parameters of a rafting unit was associated with the latter of log packages for afloat and ashore positions. The approximating dependencies for theoretical investigations and practical activities were developed. The reliability of estimates was proved via the physical models experiments.


2014 ◽  
Vol 61 (1) ◽  
pp. 139-152 ◽  
Author(s):  
Atta Oveisi

Abstract This paper investigates the influence of surface effects on free transverse vibration of piezoelectric nanowires (NWs). The dynamic model of the NW is tackled using nonlocal Timoshenko beam theory. By implementing this theory with consideration of both non-local effect and surface effect under simply support boundary condition, the natural frequencies of the NW are calculated. Also, a closed form solution is obtained in order to calculate fundamental buckling voltage. Finally, the effect of small scale effect on residual surface tension and critical electric potential is explored. The results can help to design piezo-NW based instruments.


Symmetry ◽  
2020 ◽  
Vol 12 (3) ◽  
pp. 466 ◽  
Author(s):  
Mohammad Hassan Dindarloo ◽  
Li Li ◽  
Rossana Dimitri ◽  
Francesco Tornabene

In this paper, we focus on the bending behavior of isotropic doubly-curved nanoshells based on a high-order shear deformation theory, whose shape functions are selected as an accurate combination of exponential and trigonometric functions instead of the classical polynomial functions. The small-scale effect of the nanostructure is modeled according to the differential law consequent, but is not equivalent to the strain-driven nonlocal integral theory of elasticity equipped with Helmholtz’s averaging kernel. The governing equations of the problem are obtained from the Hamilton’s principle, whereas the Navier’s series are proposed for a closed form solution of the structural problem involving simply-supported nanostructures. The work provides a unified framework for the bending study of both thin and thick symmetric doubly-curved shallow and deep nanoshells, while investigating spherical and cylindrical panels subjected to a point or a sinusoidal loading condition. The effect of several parameters, such as the nonlocal parameter, as well as the mechanical and geometrical properties, is investigated on the bending deflection of isotropic doubly-curved shallow and deep nanoshells. The numerical results from our investigation could be considered as valid benchmarks in the literature for possible further analyses of doubly-curved applications in nanotechnology.


2021 ◽  
Vol 0 (0) ◽  
pp. 0
Author(s):  
Leunglung Chan ◽  
Song-Ping Zhu

<p style='text-indent:20px;'>This paper investigates the pricing of European-style lookback options when the price dynamics of the underlying risky asset are assumed to follow a Markov-modulated Geometric Brownian motion; that is, the appreciation rate and the volatility of the underlying risky asset depend on states of the economy described by a continuous-time Markov chain process. We derive an exact, explicit and closed-form solution for European-style lookback options in a two-state regime switching model.</p>


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