Optimal stopping time with stochastic volatility

Abstract

This paper demonstrates how to convert a path-dependent optimal stopping time problem into a path-independent problem using a transformation analysis method. We test this method to deal with several problems, especially those in stochastic volatility environments. We introduce stochastic state variables into volatility dynamics and analyse the influence of state-variable volatile characters on investment stopping boundaries. For arbitrary coefficient circumstances, we set up a Riccati equation that satisfies the transformation. For circumstances involving Heston stochastic-volatility, we propose an analytical solution. This paper extends research on the optimal investment stopping issue to a stochastic investment opportunity environment. Our proposed method can enhance the ability of optimal investment stopping theory to describe the real capital market.