A Nonconvex Singular Stochastic Control Problem and its Related Optimal Stopping Boundaries

Abstract

Equivalences are known between problems of singular stochastic control (SSC) with convex performance criteria and related questions of optimal stopping; see, for example, Karatzas and Shreve [SIAM J. Control Optim., 22 (1984), pp. 856--877]. The aim of this paper is to investigate how far connections of this type generalize to a nonconvex problem of purchasing electricity. Where the classical equivalence breaks down we provide alternative connections to optimal stopping problems. We consider a nonconvex infinite time horizon SSC problem whose state consists of an uncontrolled diffusion representing a real-valued commodity price, and a controlled increasing bounded process representing an inventory. We analyze the geometry of the action and inaction regions by characterizing their (optimal) boundaries. Unlike the case of convex SSC problems we find that the optimal boundaries may be both reflecting and repelling and it is natural to interpret the problem as one of SSC with discretionary stopping.

Read More: https://epubs.siam.org/doi/10.1137/14096801X