On an integral equation for the free boundary of stochastic, irreversible investment problems
نویسنده
چکیده
In this paper we derive a new handy integral equation for the free boundary of infinite time horizon, continuous time, stochastic, irreversible investment problems with uncertainty modeled as a one-dimensional, regular diffusion X0,x. The new integral equation allows to explicitly find the free boundary b(·) in some so far unsolved cases, as when X0,x is a three-dimensional Bessel process or a CEV process. Our result follows from purely probabilistic arguments. Indeed, we first show that b(X0,x(t)) = l∗(t), with l∗(t) unique optional solution of a representation problem in the spirit of Bank-El Karoui [4]; then, thanks to such identification and the fact that l∗ uniquely solves a backward stochastic equation, we find the integral problem for the free boundary.
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