Optimal control models in finance. A new computational approach. (Q1762580)

This book discusses the general applications of optimal control methods to several areas in finance with a particular focus on the application of bang-bang control to financial modelling. In Chapter 1 a typical general financial optimal control model is given to explain the formula of the optimal control problems and their accompanying optimal control theories. Some classical concepts in operations research and famous standard optimal control theories are introduced and a brief description on how they are applied in financial optimal control problems is presented. The algorithms on similar optimal control problems achieved by other researchers are discussed. In Chapter 2 the authors discuss a particular case of optimal control problems and the switching time variable algorithm. The piecewise-linear transformation and the computational algorithms are presented. A simple optimal aggregate investment planning model is discussed. A part of the computer software SCOM is used to solve the differential equation. Chapter 3 presents a financial oscillator model whose state is a second-order differential equation. A transformation of time scale used to obtain the optimal switching times as well as a better gradient are presented. The transformations of the control, state, and the objective function are changed corresponding to the new time subdivision. The computational methods for these kinds of optimal control problems are constructed. The control is approximated by a step-function. Additional analysis of the control with different patterns leading to different minimums is discussed. Two sets of graphical results with different control patterns are presented. In Chapter 4 an optimal corporate financing model has been used. The analytical solution, which was created by Davis and Elzinga, is discussed. An important technique called ``penalty term'' is introduced for solving optimal control problems with constraints and end-term condition. The transformations of this model are described for the computation. The computational algorithms for this model are constructed and a computer software package for the algorithms is shown in Appendix. The analysis and discussion of the computing results are presented. Chapter 5 gives some experiments that have been done for examining the computational algorithms developed in Chapter 2 and Chapter 3 for computing dynamic optimization financial models. The computation tests for the algorithms in Chapter 2 are presented. Three computing examples are included. The problems met during computation are discussed and the solutions for those problems are indicated. A different control policy with one possible pattern of the financial optimal control problem is considered. The computing results of this new control policy are presented.