Recombining Tree Approximations for Optimal Stopping for Diffusions

TL;DR

This paper introduces two numerical methods using Skorohod embedding to create recombining tree approximations for one-dimensional diffusions, enabling efficient and nearly optimal stopping time calculations with proven convergence rates.

Contribution

The paper presents novel numerical schemes that leverage Skorohod embedding for improved recombining tree approximations in optimal stopping problems for diffusions.

Findings

Methods demonstrate convergence rates

Schemes produce nearly optimal stopping times

Efficiency shown on multiple models

Abstract

In this paper we develop two numerical methods for optimal stopping in the framework of one dimensional diffusion. Both of the methods use the Skorohod embedding in order to construct recombining tree approximations for diffusions with general coefficients. This technique allows us to determine convergence rates and construct nearly optimal stopping times which are optimal at the same rate. Finally, we demonstrate the efficiency of our schemes on several models