Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
480637 | European Journal of Operational Research | 2016 | 10 Pages |
•Study optimal switching problems under “fast” mean-reverting stochastic volatility.•Derive closed-form approximations of the full problem via homogenization theory.•Apply our general solution to well-known switching problems and volatility models.•Proposed method is of interest to applied problems involving switching flexibility.
We study infinite-horizon, optimal switching problems for underlying processes that exhibiting “fast” mean-reverting stochastic volatility. We obtain closed-form analytic approximations of the solution for the resulting quasi-variational inequalities, that provide quantitative and qualitative results for the effects of multi-scale variability of the underlying process on the optimal switching rule. The proposed methodology is applicable to a number of operations research problems involving switching flexibility.