Dynamic intertemporal utility optimization by means of Riccati transformation of Hamilton-Jacobi-Bellman equation

DOI10.1007/S13160-019-00349-3zbMATH Open1419.35095arXiv1903.10065OpenAlexW2962912097WikidataQ128139104 ScholiaQ128139104MaRDI QIDQ2318503FDOQ2318503

Authors: S. Kilianová, Daniel Ševčovič 

Publication date: 15 August 2019

Published in: Japan Journal of Industrial and Applied Mathematics (Search for Journal in Brave)

Abstract: In this paper we investigate a dynamic stochastic portfolio optimization problem involving both the expected terminal utility and intertemporal utility maximization. We solve the problem by means of a solution to a fully nonlinear evolutionary Hamilton-Jacobi-Bellman (HJB) equation. We propose the so-called Riccati method for transformation of the fully nonlinear HJB equation into a quasi-linear parabolic equation with non-local terms involving the intertemporal utility function. As a numerical method we propose a semi-implicit scheme in time based on a finite volume approximation in the spatial variable. By analyzing an explicit traveling wave solution we show that the numerical method is of the second experimental order of convergence. As a practical application we compute optimal strategies for a portfolio investment problem motivated by market financial data of German DAX 30 Index and show the effect of considering intertemporal utility on optimal portfolio selection.

Full work available at URL: https://arxiv.org/abs/1903.10065

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zbMATH Keywords

Hamilton-Jacobi-Bellman equationfinite volume schemeRiccati transformationdynamic utilitydynamic stochastic portfolio optimization

Mathematics Subject Classification ID

Numerical methods (including Monte Carlo methods) (91G60) PDEs in connection with game theory, economics, social and behavioral sciences (35Q91) Portfolio theory (91G10) Nonlinear parabolic equations (35K55) PDEs with randomness, stochastic partial differential equations (35R60) Finite element, Rayleigh-Ritz and Galerkin methods for boundary value problems involving PDEs (65N30)

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Cited In (5)

• Robust portfolio optimization via solution to the Hamilton-Jacobi-Bellman equation
• Application of maximal monotone operator method for solving Hamilton-Jacobi-Bellman equation arising from optimal portfolio selection problem
• The solution of riccati's equation asthe hessian of bellman's function
• Optimal exercise of American puts with transaction costs under utility maximization
• A transformation method for solving the Hamilton-Jacobi-Bellman equation for a constrained dynamic stochastic optimal allocation problem

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