Recommended Citation
Published in The Annals of Applied Probability, Volume 18, Issue 6, January 1, 2008, pages 2367-2391.
NOTE: At the time of publication, the author Kevin Ross was not yet affiliated with Cal Poly.
The definitive version is available at https://doi.org/10.1214/08-AAP525.
Abstract
A singular stochastic control problem with state constraints in twodimensions is studied. We show that the value function is C1 and its directional derivatives are the value functions of certain optimal stopping problems. Guided by the optimal stopping problem, we then introduce the associated no-action region and the free boundary and show that, under appropriate conditions, an optimally controlled process is a Brownian motion in the noaction region with reflection at the free boundary. This proves a conjecture of Martins, Shreve and Soner [SIAM J. Control Optim. 34 (1996) 2133–2171] on the form of an optimal control for this class of singular control problems. An important issue in our analysis is that the running cost is Lipschitz but not C1. This lack of smoothness is one of the key obstacles in establishing regularity of the free boundary and of the value function. We show that the free boundary is Lipschitz and that the value function is C2 in the interior of the no-action region.We then use a verification argument applied to a suitable C2 approximation of the value function to establish optimality of the conjectured control.
Disciplines
Statistics and Probability
Copyright
URL: https://digitalcommons.calpoly.edu/stat_fac/39