Reinforcement Learning in Real Option Models
Abstract
We investigate an entropy-regularized reinforcement learning (RL) approach to optimal stopping problems motivated by real option models. Classical stopping rules are strict and non-randomized, limiting natural exploration in RL settings. To address this, we introduce entropy regularization, allowing randomized stopping policies that balance exploitation and exploration. We derive an explicit analytical solution to the regularized problem and prove convergence of the associated free boundary to the classical stopping threshold as the entropy vanishes. The regularized problem admits a natural formulation as a singular stochastic control problem. Building on this structure, we propose both model-based and model-free policy iteration algorithms to learn the optimal boundary. The model-free method operates without knowledge of system dynamics, using only trajectories from the stochastic environment. We establish convergence guarantees and illustrate strong numerical performance. This framework provides a principled and tractable approach for data-driven stopping problems under uncertainty.
Cite
@article{arxiv.2602.15643,
title = {Reinforcement Learning in Real Option Models},
author = {Jodi Dianetti and Giorgio Ferrari and Renyuan Xu},
journal= {arXiv preprint arXiv:2602.15643},
year = {2026}
}
Comments
arXiv admin note: substantial text overlap with arXiv:2408.09335