An application of stochastic control theory to financial economics
We consider a portfolio optimization problem which is formulated as a stochastic control problem. Risky asset prices obey a logarithmic Brownian motion, and interest rates vary according to an ergodic Markov diffusion process. The goal is to choose optimal investment and consumption policies to maxi...
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| Veröffentlicht in: | SIAM journal on control and optimization 2004-01, Vol.43 (2), p.502-531 |
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| container_title | SIAM journal on control and optimization |
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| creator | FLEMING, Wendell H PANG, Tao |
| description | We consider a portfolio optimization problem which is formulated as a stochastic control problem. Risky asset prices obey a logarithmic Brownian motion, and interest rates vary according to an ergodic Markov diffusion process. The goal is to choose optimal investment and consumption policies to maximize the infinite horizon expected discounted hyperbolic absolute risk aversion (HARA) utility of consumption. A dynamic programming principle is used to derive the dynamic programming equation (DPE). The subsolution--supersolution method is used to obtain existence of solutions of the DPE. The solutions are then used to derive the optimal investment and consumption policies. |
| doi_str_mv | 10.1137/s0363012902419060 |
| format | Article |
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| identifier | ISSN: 0363-0129 |
| ispartof | SIAM journal on control and optimization, 2004-01, Vol.43 (2), p.502-531 |
| issn | 0363-0129 1095-7138 |
| language | eng |
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| source | SIAM Journals Online; Business Source Complete |
| subjects | Applied mathematics Applied sciences Brownian motion Computer science control theory systems Control theory. Systems Dynamic programming Exact sciences and technology Interest rates Investments Mathematical programming Operational research and scientific management Operational research. Management science Optimization Portfolio theory Stochastic control theory Utility functions |
| title | An application of stochastic control theory to financial economics |
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