A numerical scheme for a singular control problem: investment-consumption under proportional transaction costs

DOI10.1016/J.CAM.2017.10.035zbMATH Open1405.91700arXiv1711.01017OpenAlexW2964139766MaRDI QIDQ679585FDOQ679585

Authors: Wan-Yu Tsai, Arash Fahim 

Publication date: 11 January 2018

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

Abstract: This paper concerns the numerical solution of a fully nonlinear parabolic double obstacle problem arising from a finite portfolio selection with proportional transaction costs. We consider the optimal allocation of wealth among multiple stocks and a bank account in order to maximize the finite horizon discounted utility of consumption. The problem is mainly governed by a time-dependent Hamilton-Jacobi-Bellman equation with gradient constraints. We propose a numerical method which is composed of Monte Carlo simulation to take advantage of the high-dimensional properties and finite difference method to approximate the gradients of the value function. Numerical results illustrate behaviors of the optimal trading strategies and also satisfy all qualitative properties proved in Dai et al. (2009) and Chen and Dai (2013).

Full work available at URL: https://arxiv.org/abs/1711.01017

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zbMATH Keywords

backward stochastic differential equationsHamilton-Jacobi-Bellman equationportfolio optimizationstochastic controltransaction costsMonte Carlo approximation

Mathematics Subject Classification ID

Monte Carlo methods (65C05) Stochastic partial differential equations (aspects of stochastic analysis) (60H15) Numerical methods (including Monte Carlo methods) (91G60) Portfolio theory (91G10) Dynamic programming in optimal control and differential games (49L20) Optimal stochastic control (93E20)

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Cited In (6)

• Numerical solution of an optimal investment problem with proportional transaction costs
• Optimal portfolio allocation of commodity related assets using a controlled forward-backward stochastic algorithm
• Optimal investment with transaction costs based on exponential utility function: a parabolic double obstacle problem
• Title not available (Why is that?)
• A computational scheme for optimal investment - consumption with proportional transaction costs
• Numerical schemes for investment models with singular transactions

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