A spectral method for an optimal investment problem with transaction costs under potential utility

DOI10.1016/J.CAM.2017.01.015zbMATH Open1360.91157arXiv1612.09469OpenAlexW2599366629MaRDI QIDQ515774FDOQ515774

Authors: Javier de Frutos, Víctor Gatón 

Publication date: 16 March 2017

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

Abstract: This paper concerns the numerical solution of the finite-horizon Optimal Investment problem with transaction costs under Potential Utility. The problem is initially posed in terms of an evolutive HJB equation with gradient constraints. In Finite-Horizon Optimal Investment with Transaction Costs: A Parabolic Double Obstacle Problem, Day-Yi, the problem is reformulated as a non-linear parabolic double obstacle problem posed in one spatial variable and defined in an unbounded domain where several explicit properties and formulas are obtained. The restatement of the problem in polar coordinates allows to pose the problem in one spatial variable in a finite domain, avoiding some of the technical difficulties of the numerical solution of the previous statement of the problem. If high precision is required, the spectral numerical method proposed becomes more efficient than simpler methods as finite differences for example.

Full work available at URL: https://arxiv.org/abs/1612.09469

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zbMATH Keywords

transaction costsspectral methodoptimal investmentpotential utility

Mathematics Subject Classification ID

Numerical methods (including Monte Carlo methods) (91G60) Portfolio theory (91G10) Optimal stochastic control (93E20) Spectral, collocation and related methods for initial value and initial-boundary value problems involving PDEs (65M70)

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Cited In (4)

• Numerical solution of an optimal investment problem with proportional transaction costs
• A pseudospectral method for option pricing with transaction costs under exponential utility
• Chebyshev reduced basis function applied to option valuation
• Spectral utility, Wiener-Hopf techniques, and rational expectations

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