Optimal stopping problems for the maximum process with upper and lower caps

TL;DR

This paper studies modified optimal stopping problems based on the maximum of spectrally negative Lévy processes, providing explicit solutions and characterizing stopping boundaries using scale functions, with applications in finance and stochastic control.

Contribution

It introduces capped and pre-fall stopping variants of the Shepp-Shiryaev problem, deriving explicit solutions and boundary characterizations using scale functions.

Findings

Explicit solutions for capped Shepp-Shiryaev problems

Characterization of stopping boundaries via differential equations

Analysis of pre-fall stopping modifications

Abstract

This paper concerns optimal stopping problems driven by the running maximum of a spectrally negative L\'{e}vy process $X$. More precisely, we are interested in modifications of the Shepp-Shiryaev optimal stopping problem [Avram, Kyprianou and Pistorius Ann. Appl. Probab. 14 (2004) 215-238; Shepp and Shiryaev Ann. Appl. Probab. 3 (1993) 631-640; Shepp and Shiryaev Theory Probab. Appl. 39 (1993) 103-119]. First, we consider a capped version of the Shepp-Shiryaev optimal stopping problem and provide the solution explicitly in terms of scale functions. In particular, the optimal stopping boundary is characterised by an ordinary differential equation involving scale functions and changes according to the path variation of $X$. Secondly, in the spirit of [Shepp, Shiryaev and Sulem Advances in Finance and Stochastics (2002) 271-284 Springer], we consider a modification of the capped version of the Shepp-Shiryaev optimal stopping problem in the sense that the decision to stop has to be made before the process $X$ falls below a given level.