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DUAL REPRESENTATIONS FOR GENERAL MULTIPLE STOPPING PROBLEMS
Author(s) -
Bender Christian,
Schoenmakers John,
Zhang Jianing
Publication year - 2015
Publication title -
mathematical finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.98
H-Index - 81
eISSN - 1467-9965
pISSN - 0960-1627
DOI - 10.1111/mafi.12030
Subject(s) - optimal stopping , representation (politics) , dual (grammatical number) , cash flow , mathematical optimization , exponential function , monte carlo method , binomial options pricing model , computer science , valuation of options , flow (mathematics) , mathematical economics , mathematics , econometrics , finance , economics , statistics , art , mathematical analysis , geometry , literature , political science , law , politics
In this paper, we study the dual representation for generalized multiple stopping problems, hence the pricing problem of general multiple exercise options. We derive a dual representation which allows for cash flows which are subject to volume constraints modeled by integer‐valued adapted processes and refraction periods modeled by stopping times. As such, this extends the works by Schoenmakers ([Schoenmakers, J., 2012]), Bender ([Bender, C., 2011a]), Bender ([Bender, C., 2011b]), Aleksandrov and Hambly ([Aleksandrov, N., 2010]), and Meinshausen and Hambly ([Meinshausen, N., 2004]) on multiple exercise options, which either take into consideration a refraction period or volume constraints, but not both simultaneously. We also allow more flexible cash flow structures than the additive structure in the above references. For example, some exponential utility problems are covered by our setting. We supplement the theoretical results with an explicit Monte Carlo algorithm for constructing confidence intervals for prices of multiple exercise options and illustrate it with a numerical study on the pricing of a swing option in an electricity market.