Solving a class of zero-sum stopping game with regime switching

Abstract: This paper studies a class of zero-sum stopping game in a regime switching model. A verification theorem as a sufficient criterion for Nash equilibriums is established based on a set of variational inequalities (VIs). Under an appropriate regularity condition for solutions to the VIs, a suitable system of algebraic equations is derived via the so-called smooth-fit principle. Explicit Nash equilibrium stopping rules of threshold-type for the two players and the corresponding value function of the game in closed form are obtained. Numerical experiments are reported to demonstrate the dependence of the threshold levels on various model parameters. A reduction to the case with no regime switching is also presented as a comparison.