Article ID: | iaor200954163 |
Country: | United States |
Volume: | 33 |
Issue: | 2 |
Start Page Number: | 336 |
End Page Number: | 350 |
Publication Date: | May 2008 |
Journal: | Mathematics of Operations Research |
Authors: | Bayraktar Erhan, Egami Masahiko |
We consider a singular stochastic control problem, which is called the monotone follower stochastic control problem, and give sufficient conditions for the existence and uniqueness of a local–time type optimal control. To establish this result, we use a methodology that has not been employed to solve singular control problems. We first confine ourselves to local–time strategies. We then apply a transformation to the total reward accrued by reflecting the diffusion at a given boundary and show that it is linear in its continuation region. Now, the problem of finding the optimal boundary becomes a nonlinear optimization problem: The slope of the linear function and an obstacle function need to be simultaneously maximized. The necessary conditions of optimality come from first–order derivative conditions. We show that under some weak assumptions these conditions become sufficient. We also show that the local–time strategies are optimal in the class of all monotone increasing controls.