Mathematics for Economists

(Greg DeLong) #1

Optimal stopping


Theorem


The optimal strategy is

τ = min(tjHt=Xt)=min(tjHtXt)=
= min(tjHtE(Xt+ 1 j Ft)).

The interpretation is quite simple. One must stop (in our case sell) when
one sees that the present payout is better then the expected future payout
given our knowledge at that moment.
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