Two-Sided Singular Control of an Inventory with Unknown Demand Trend

DOI10.1137/21M1442115zbMATH Open1526.93277arXiv2102.11555OpenAlexW3139364221MaRDI QIDQ6057797FDOQ6057797

Authors: Salvatore Federico, Giorgio Ferrari, Neofytos Rodosthenous 

Publication date: 26 October 2023

Published in: SIAM Journal on Control and Optimization (Search for Journal in Brave)

Abstract: We study the problem of optimally managing an inventory with unknown demand trend. Our formulation leads to a stochastic control problem under partial observation, in which a Brownian motion with non-observable drift can be singularly controlled in both an upward and downward direction. We first derive the equivalent separated problem under full information, with state-space components given by the Brownian motion and the filtering estimate of its unknown drift, and we then completely solve this latter problem. Our approach uses the transition amongst three different but equivalent problem formulations, links between two-dimensional bounded-variation stochastic control problems and games of optimal stopping, and probabilistic methods in combination with refined viscosity theory arguments. We show substantial regularity of (a transformed version of) the value function, we construct an optimal control rule, and we show that the free boundaries delineating (transformed) action and inaction regions are bounded globally Lipschitz continuous functions. To our knowledge this is the first time that such a problem has been solved in the literature.

Full work available at URL: https://arxiv.org/abs/2102.11555

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zbMATH Keywords

partial observationfree boundariesinventory managementDynkin gamesbounded-variation stochastic control

Mathematics Subject Classification ID

Filtering in stochastic control theory (93E11) Variational inequalities (49J40) Inventory, storage, reservoirs (90B05) Games of timing (91A55) Optimal stochastic control (93E20)

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Cited In (1)

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