Optimal investment strategies in a certain class of stochastic Merton’s terminal wealth problems

Alexander Bratus, Ivan Yegorov, Daniil Yurchenko

Research output: Contribution to journalArticle

2 Citations (Scopus)

Abstract

The paper studies the classical stochastic Merton’s terminal wealth portfolio problem without transaction costs and also some related problems which may serve as efficient benchmarks for developing relevant analytical techniques as applied to problems with transaction costs. Very few analytical solutions are available for all these types of the Merton’s problem, whereas effective applications of substantially numerical approaches are strongly restricted. Hence,even for quite narrow classes of problems, the development of analytical techniques constructing exact representations for optimal value functions and the corresponding optimal feedback controls is of great theoretical and practical importance.Despite some advancements, sufficiently simple single-input control-affine systems without state constraints and the subject of optimal control synthesis are investigated rather poorly in analytical and qualitative aspects. The present paper is devoted to an entirely analytical construction of the global optimal control synthesis in a certain class of stochastic Merton’s terminal wealth problems. A significant feature of the obtained optimal feedback controls is their capability to be interpreted naturally and adequately from a financial point of view as well as to observe a significant qualitative difference between stochastic and limiting deterministic cases.
Original languageEnglish
Pages (from-to)771-782
Number of pages12
JournalInternational Journal of Dynamics and Control
Volume5
Issue number3
Early online date5 Feb 2016
DOIs
Publication statusPublished - Sep 2017

Keywords

  • Merton’s portfolio optimization problem
  • Stochastic optimal control synthesis
  • Hamilton–Jacobi–Bellman equation

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