TY - JOUR
T1 - Optimal pricing barriers in a regulated market using reflected diffusion processes
AU - Han, Zheng
AU - Hu, Yaozhong
AU - Lee, Chihoon
N1 - Publisher Copyright:
© 2016 Taylor & Francis.
PY - 2016/4/2
Y1 - 2016/4/2
N2 - We consider a class of one-dimensional (1D) reflected stochastic differential equations (SDEs). Such reflected SDE models arise as the key approximating processes in a regulated financial market system, and our main goal is to determine the set of optimal pricing barriers. We consider the running cost associated with the deviation of the process from the desired target level, and also the control cost from the interventions in an effort to keep the process inside the boundaries. Both a long-time average (ergodic) cost criterion and an infinite horizon discount cost criterion, where the discount factor is allowed to vary from one period to another, are studied, with numerical examples illustrating our main results.
AB - We consider a class of one-dimensional (1D) reflected stochastic differential equations (SDEs). Such reflected SDE models arise as the key approximating processes in a regulated financial market system, and our main goal is to determine the set of optimal pricing barriers. We consider the running cost associated with the deviation of the process from the desired target level, and also the control cost from the interventions in an effort to keep the process inside the boundaries. Both a long-time average (ergodic) cost criterion and an infinite horizon discount cost criterion, where the discount factor is allowed to vary from one period to another, are studied, with numerical examples illustrating our main results.
KW - Ergodic cost
KW - Infinite horizon discount cost
KW - Optimal barriers
KW - Reflected stochastic differential equations
KW - Regulated (controlled) market
UR - http://www.scopus.com/inward/record.url?scp=84961199209&partnerID=8YFLogxK
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U2 - 10.1080/14697688.2015.1034163
DO - 10.1080/14697688.2015.1034163
M3 - Article
AN - SCOPUS:84961199209
SN - 1469-7688
VL - 16
SP - 639
EP - 647
JO - Quantitative Finance
JF - Quantitative Finance
IS - 4
ER -