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

DOI10.1016/J.CAM.2017.10.035MaRDI QIDQ679585zbMATH OpenOpenAlexFDO

Authors Wan-Yu Tsai, Arash Fahim

Publication date 11 January 2018

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

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

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)

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).

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Cites work

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Cited in

(6)

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