History path dependent optimal control and portfolio valuation and management (Q1863746): Difference between revisions

It is known that most models of dynamic valuation and management of portfolios consisting of shares of assets assume that the future evolution of prices of the risky assets is uncertain, stochastic. Here, it is assumed instead that the future evolution of the asset prices can be predicted or forecasted from its history through a convenient prediction mechanism to valuate the portfolio and find a regulation law allowing the manager to modify his portfolio at each instant. The purpose of the paper is to provide a Hamilton-Jacobi-Bellman (HJB) approach to history dependent control problems and portfolio management when the evolution of the prices is predicted from its history. The HJB approach is based on the fact that the valuation function (in mathematical finance) or the value function of optimal control problems (in control theory) is a solution of a system of partial differential equations, the celebrated HJB equations in control. For example, the Black-Scholes equations in finance are among them when the evolution of the price is governed by stochastic differential equations. Such an approach has been pioneered by \textit{J. Zabczyk} [Chance and decision. Stochastic control in discrete time. Quaderni, Scuola Normale Superiore, Pisa (1996)] in the case when the evolution of the prices is stochastic and discrete.