A class of solvable multidimensional stopping problems in the presence of Knightian uncertainty. (June 2021)

• Record Type: Journal Article
• Authors: Alvarez E., Luis H. R.; Christensen, Sören
• Is Part Of: Advances in applied probability. Volume 53:Number 2(2021)
• Page Start: 400
• Page End: 424
• Publication Date: 2021-06
• Subjects: κ-ambiguity -- multidimensional Brownian motion -- diffusion processes -- Bessel processes; 60J60 -- 60G40 -- 62L15 -- 91G80; Probabilities -- Periodicals; Stochastic models -- Periodicals; Electronic journals; Periodicals; 519.2
• DOI: 10.1017/apr.2020.62
• Languages: English
• ISSNs: 0001-8678

Abstract

Abstract: We investigate the impact of Knightian uncertainty on the optimal timing policy of an ambiguity-averse decision-maker in the case where the underlying factor dynamics follow a multidimensional Brownian motion and the exercise payoff depends on either a linear combination of the factors or the radial part of the driving factor dynamics. We present a general characterization of the value of the optimal timing policy and the worst-case measure in terms of a family of explicitly identified excessive functions generating an appropriate class of supermartingales. In line with previous findings based on linear diffusions, we find that ambiguity accelerates timing in comparison with the unambiguous setting. Somewhat surprisingly, we find that ambiguity may lead to stationarity in models which typically do not possess stationary behavior. In this way, our results indicate that ambiguity may act as a stabilizing mechanism.