Optimal stopping of oscillating Brownian motion

Abstract: We solve optimal stopping problems for an oscillating Brownian motion, i.e. a diffusion with positive piecewise constant volatility changing at the point $x=0$. Let $\sigma_1$ and $\sigma_2$ denote the volatilities on the negative and positive half-lines, respectively. Our main result is that continuation region of the optimal stopping problem with reward $((1+x)^+)^2$ is disconnected, if and only if $\sigma_1^2<\sigma_2^2<2\sigma_1^2$. Based on the fact that the skew Brownian motion in natural scale is an oscillating Brownian motion, the obtained results are translated into corresponding results for the skew Brownian motion.