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Linear Risk-averse Optimal Control Problems: Applications in Economics and Finance

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  • Paolo Vitale

    (Universitˆ degli studi di Chieti e Pescara and LUISS Guido Carli University of Rome)

Abstract

We discuss how Whittle's (Whittle, 1990) approach to risk-sensitive optimal control problems can be applied in economics and finance. We show how his analysis of the class of Linear Exponential Quadratic Gaussian problems can be extended to accommodate time-discounting, while preserving its simple and general recursive solutions. We apply Whittle's methodology investigating two specific problems in financial and monetary policy.

Suggested Citation

  • Paolo Vitale, 2012. "Linear Risk-averse Optimal Control Problems: Applications in Economics and Finance," Working Papers CASMEF 1203, Dipartimento di Economia e Finanza, LUISS Guido Carli.
    • Handle: RePEc:lui:casmef:1203
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    References listed on IDEAS

    as
    1. van der Ploeg, Frederick, 2004. "Prudent Monetary Policy: Applications of Cautious LQG Control and Prediction," CEPR Discussion Papers 4222, C.E.P.R. Discussion Papers.
    2. Caballe, Jordi & Krishnan, Murugappa, 1994. "Imperfect Competition in a Multi-security Market with Risk Neutrality," Econometrica, Econometric Society, vol. 62(3), pages 695-704, May.
    3. Hong Zhang, 2004. "Dynamic Beta, Time-Varying Risk Premium, and Momentum," Yale School of Management Working Papers amz2637, Yale School of Management, revised 01 Mar 2005.
    4. Vitale, P., 1995. "Risk-Averse Traders with Inside Information," Cambridge Working Papers in Economics 9504, Faculty of Economics, University of Cambridge.
    5. Subrahmanyam, Avanidhar, 1991. "Risk Aversion, Market Liquidity, and Price Efficiency," The Review of Financial Studies, Society for Financial Studies, vol. 4(3), pages 416-441.
    6. Kyle, Albert S, 1985. "Continuous Auctions and Insider Trading," Econometrica, Econometric Society, vol. 53(6), pages 1315-1335, November.
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    Cited by:

    1. Vitale, Paolo, 2012. "Risk-averse insider trading in multi-asset sequential auction markets," Economics Letters, Elsevier, vol. 117(3), pages 673-675.

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    More about this item

    Keywords

    Risk-aversion; Linear Exponential Quadratic Gaussian; Optimal Control.;
    All these keywords.

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis

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