Explicit Solution to an Optimal Extraction Problem with Regime Switching

Ferrari G, Yang S (2016)
arXiv:1602.06765.

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This paper studies an optimal irreversible extraction problem of an exhaustible commodity in presence of regime shifts. A company extracts a natural resource from a reserve with finite capacity, and sells it in the market at a spot price that evolves according to a Brownian motion with volatility modulated by a two state Markov chain. In this setting, the company aims at finding the extraction rule that maximizes its expected, discounted net cash flow. The problem is set up as a finite-fuel two-dimensional degenerate singular stochastic control problem over an infinite time horizon, and we provide explicit expressions both for the value function and for the optimal control. The latter prescribes a Skorokhod reflection of the optimally controlled state process at a certain state and price dependent threshold. This curve is given in terms of the optimal stopping boundary of an auxiliary family of perpetual optimal selling problems with regime switching. The techniques are those of stochastic calculus and stochastic optimal control theory.
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Ferrari G, Yang S. Explicit Solution to an Optimal Extraction Problem with Regime Switching. arXiv:1602.06765. 2016.
Ferrari, G., & Yang, S. (2016). Explicit Solution to an Optimal Extraction Problem with Regime Switching. arXiv:1602.06765.
Ferrari, G., and Yang, S. (2016). Explicit Solution to an Optimal Extraction Problem with Regime Switching. arXiv:1602.06765.
Ferrari, G., & Yang, S., 2016. Explicit Solution to an Optimal Extraction Problem with Regime Switching. arXiv:1602.06765.
G. Ferrari and S. Yang, “Explicit Solution to an Optimal Extraction Problem with Regime Switching”, arXiv:1602.06765, 2016.
Ferrari, G., Yang, S.: Explicit Solution to an Optimal Extraction Problem with Regime Switching. arXiv:1602.06765. (2016).
Ferrari, Giorgio, and Yang, Shuzhen. “Explicit Solution to an Optimal Extraction Problem with Regime Switching”. arXiv:1602.06765 (2016).
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