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Optimal control problems for stochastic processes with absorbing regime

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  • yaacov Kopeliovich

Abstract

In this paper we formulate and solve an optimal problem for Stochastic process with a regime absorbing state. The solution for this problem is obtained through a system of partial differential equations. The method is applied to obtain an explicit solution for the Merton portfolio problem when an asset has a default probability in case of a log utility.

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  • yaacov Kopeliovich, 2023. "Optimal control problems for stochastic processes with absorbing regime," Papers 2305.01490, arXiv.org.
    • Handle: RePEc:arx:papers:2305.01490
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    References listed on IDEAS

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    1. Brennan, Michael J. & Schwartz, Eduardo S. & Lagnado, Ronald, 1997. "Strategic asset allocation," Journal of Economic Dynamics and Control, Elsevier, vol. 21(8-9), pages 1377-1403, June.
    2. Merton, Robert C., 1971. "Optimum consumption and portfolio rules in a continuous-time model," Journal of Economic Theory, Elsevier, vol. 3(4), pages 373-413, December.
    3. Q. Zhang & G. Yin, 2004. "Nearly-Optimal Asset Allocation in Hybrid Stock Investment Models," Journal of Optimization Theory and Applications, Springer, vol. 121(2), pages 419-444, May.
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    Cited by:

    1. Yaacov Kopeliovich & Michael Pokojovy, 2024. "On Merton's Optimal Portfolio Problem under Sporadic Bankruptcy," Papers 2403.15923, arXiv.org.

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