Optimal expulsion and optimal confinement of a Brownian particle with a switching cost

TL;DR

This paper addresses stochastic control problems involving a Brownian particle where the goal is to optimize exit times from an interval by controlling drift with switching costs, solving free boundary problems to find optimal strategies.

Contribution

It provides explicit solutions for the value functions and optimal strategies in two control problems with switching costs, including proofs of their uniqueness.

Findings

Explicit value functions derived for both problems

Optimal strategies characterized and proven unique

Solutions involve free boundary problems and smooth fit principle

Abstract

We solve two stochastic control problems in which a player tries to minimize or maximize the exit time from an interval of a Brownian particle, by controlling its drift. The player can change from one drift to another but is subject to a switching cost. In each problem, the value function is written as the solution of a free boundary problem involving second order ordinary differential equations, in which the unknown boundaries are found by applying the principle of smooth fit. For both problems, we compute the value function, we exhibit the optimal strategy and we prove its generic uniqueness.