2017arXiv (Cornell University)Open access

Dynamic Programming Principles for Optimal Stopping with Expectation Constraint

Erhan Bayraktar, Song Yao

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Abstract

We analyze an optimal stopping problem with a constraint on the expected cost. When the reward function and cost function are Lipschitz continuous in state variable, we show that the value of such an optimal stopping problem is a continuous function in current state and in budget level. Then we derive a dynamic programming principle (DPP) for the value function in which the conditional expected cost acts as an additional state process. As the optimal stopping problem with expectation constraint can be transformed to a stochastic optimization problem with supermartingale controls, we explore a second DPP of the value function and thus resolve an open question recently raised in [S. Ankirchner, M. Klein, and T. Kruse, A verification theorem for optimal stopping problems with expectation constraints, Appl. Math. Optim., 2017, pp. 1-33]. Based on these two DPPs, we characterize the value function as a viscosity solution to the related fully non-linear parabolic Hamilton-Jacobi-Bellman equation.

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We analyze an optimal stopping problem with a constraint on the expected cost. When the reward function and cost function are Lipschitz continuous in state variable, we show that the value of such an optimal stopping problem is a continuous function in current state and in budget level. Then we derive a dynamic programming principle (DPP) for the value function in which the conditional expected cost acts as an additional state process. As the optimal stopping problem with expectation constraint can be transformed to a stochastic optimization problem with supermartingale controls, we explore a second DPP of the value function and thus resolve an open question recently raised in [S. Ankirchner, M. Klein, and T. Kruse, A verification theorem for optimal stopping problems with expectation constraints, Appl. Math. Optim., 2017, pp. 1-33]. Based on these two DPPs, we characterize the value function as a viscosity solution to the related fully non-linear parabolic Hamilton-Jacobi-Bellman equation.

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Available abstract

We analyze an optimal stopping problem with a constraint on the expected cost. When the reward function and cost function are Lipschitz continuous in state variable, we show that the value of such an optimal stopping problem is a continuous function in current state and in budget level. Then we derive a dynamic programming principle (DPP) for the value function in which the conditional expected cost acts as an additional state process. As the optimal stopping problem with expectation constraint can be transformed to a stochastic optimization problem with supermartingale controls, we explore a second DPP of the value function and thus resolve an open question recently raised in [S. Ankirchner, M. Klein, and T. Kruse, A verification theorem for optimal stopping problems with expectation constraints, Appl. Math. Optim., 2017, pp. 1-33]. Based on these two DPPs, we characterize the value function as a viscosity solution to the related fully non-linear parabolic Hamilton-Jacobi-Bellman equation.

Key concepts: Bellman equation, Optimal stopping, Lipschitz continuity, Optional stopping theorem, Viscosity solution, Dynamic programming, Mathematical optimization, Mathematics

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