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Principle of smooth fit and diffusions with angles
2007
Stochastics: An International Journal of Probability and Stochastic Processes
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We show that there exists a regular diffusion process X and a differentiable gain function G such that the value function V of the optimal stopping problem fails to satisfy the smooth fit condition V (b) = G (b) at the optimal stopping point b . On the other hand, if the scale function S of X is differentiable at b , then the smooth fit condition V (b) = G (b) holds (whenever X is regular and G is differentiable at b ). We give an example showing that the latter can happen even when d
doi:10.1080/17442500601040461
fatcat:t2ci7mbjlba7jdg27zces74nf4