Advanced Search
MyIDEAS: Login to save this paper or follow this series

The Markov Chain Approximation Approach for Numerical Solution of Stochastic Control Problems: Experiences from Merton's Problem

Contents:

Author Info

  • Claus Munk

    (Odense University, Denmark)

Abstract

Many problems in modern financial economics involve the solution of continuous-time, continuous-state stochastic control problems. Since explicit solutions of such problems are extremely rare, efficient numerical methods are called for. The Markov chain approximation approach provides a class of methods that are simple to understand and implement. In this paper, we compare the performance of different variations of the approach on a problem with a well-known solution, namely Merton's consumption/portfolio problem. We suggest a variant of the method, which outperforms the known variants, at least when applied to this specific problem. We document that the size of the contraction parameter of the control problem is of great importance for the accuracy of the numerical results. We also demonstrate that the Richardson extrapolation technique can improce accuracy significantly.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://128.118.178.162/eps/fin/papers/9802/9802002.pdf
Download Restriction: no

File URL: http://128.118.178.162/eps/fin/papers/9802/9802002.ps.gz
Download Restriction: no

Bibliographic Info

Paper provided by EconWPA in its series Finance with number 9802002.

as in new window
Length: 31 pages
Date of creation: 11 Feb 1998
Date of revision:
Handle: RePEc:wpa:wuwpfi:9802002

Note: Type of Document - Latex 2e; prepared on PC; to print on PostScript; pages: 31 ; figures: included
Contact details of provider:
Web page: http://128.118.178.162

Related research

Keywords: Stochastic control; efficient numerical solution; Merton's consumption/portfolio problem;

Find related papers by JEL classification:

This paper has been announced in the following NEP Reports:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Bunch, David S & Johnson, Herb, 1992. " A Simple and Numerically Efficient Valuation Method for American Puts Using a Modified Geske-Johnson Approach," Journal of Finance, American Finance Association, vol. 47(2), pages 809-16, June.
  2. Rust, John, 1996. "Numerical dynamic programming in economics," Handbook of Computational Economics, in: H. M. Amman & D. A. Kendrick & J. Rust (ed.), Handbook of Computational Economics, edition 1, volume 1, chapter 14, pages 619-729 Elsevier.
  3. R. C. Merton, 1970. "Optimum Consumption and Portfolio Rules in a Continuous-time Model," Working papers 58, Massachusetts Institute of Technology (MIT), Department of Economics.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Jonen, Benjamin & Scheuring, Simon, 2014. "Time-varying international diversification and the forward premium," Journal of International Money and Finance, Elsevier, vol. 40(C), pages 128-148.
  2. Simon Lysbjerg Hansen, 2005. "A Malliavin-based Monte-Carlo Approach for Numerical Solution of Stochastic Control Problems: Experiences from Merton's Problem," Computing in Economics and Finance 2005 391, Society for Computational Economics.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:wpa:wuwpfi:9802002. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (EconWPA).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.