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Optimal stopping for Brownian motion with applications to sequential analysis and option pricing |
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| Authors: | Tze Leung Lai Tiong Wee Lim |
| Affiliation: | aDepartment of Statistics, Sequoia Hall, Stanford University, Stanford, CA 94305-4065, USA bDepartment of Statistics and Applied Probability, National University of Singapore, 6 Science Drive 2, Singapore 117546, Republic of Singapore |
| Abstract: | Herman Chernoff made fundamental contributions to analytical and computational methods for solving optimal stopping problems for Brownian motion. He also showed how these optimal stopping problems are closely related to some basic problems in sequential analysis and singular stochastic control. This paper gives a survey of these and related developments and describes some recent applications to option valuation in financial economics. |
| Keywords: | Heat equation Free boundary problems Bayes sequential tests Multi-armed bandits European and American options Singular stochastic control |
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