A note on randomized Shepp’s urn scheme

Abstract

Shepp’s urn model is a useful tool for analyzing the stopping-rule problems in economics and finance. In [R.W. Chen, A. Zame, C.T. Lin, H. Wu, A random version of Shepp’s urn scheme, SIAM J. Discrete Math. 19 (1) (2005) 149–164], Chen et al. considered a random version of Shepp’s urn scheme and showed that a simple drawing policy (called “the k in the hole policy”) can asymptotically maximize the expected value of the game. By extending the work done by Chen et al., this note considers a more general urn scheme that is better suited to real-life price models in which the short-term value might not fluctuate. Further, “the k in the hole policy” is shown to be asymptotically optimal for this new urn scheme.