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New approach to stochastic optimal control and applications to economics

Author

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  • Josa-Fombellida, Ricardo
  • Rincón-Zapatero, Juan Pablo

Abstract

This paper provides new insights into the solution of optimal stochastic control problems by means of a system of partial differential equations, which characterize directly the optimal control. This new system is obtained by the application of the stochastic maximum principle at every initial condition, assuming that the optimal controls are smooth enough. The type of problems considered are those where the diffusion coefficient is independent of the control variables, which are supposed to be interior to the control region. The results obtained are applied to the study of the classical consumption–savings model.

Suggested Citation

  • Josa-Fombellida, Ricardo & Rincón-Zapatero, Juan Pablo, 2005. "New approach to stochastic optimal control and applications to economics," UC3M Working papers. Economics we053219, Universidad Carlos III de Madrid. Departamento de Economía.
    • Handle: RePEc:cte:werepe:we053219
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    Cited by:

    1. R. Josa-Fombellida & J. P. Rincón-Zapatero, 2007. "New Approach to Stochastic Optimal Control," Journal of Optimization Theory and Applications, Springer, vol. 135(1), pages 163-177, October.

    More about this item

    Keywords

    Optimal stochastic control;

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making

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