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Stochastic Optimal Control with Applications in Financial Engineering

In: Optimization and Optimal Control

Author

Listed:
  • Hans P. Geering

    (ETH Zurich, Measurement and Control Laboratory)

  • Florian Herzog

    (SwissQuant Group AG)

  • Gabriel Dondi

    (SwissQuant Group AG)

Abstract

Summary In this chapter, it is shown how stochastic optimal control theory can be used in order to solve problems of optimal asset allocation under consideration of risk aversion. Two types of problems are presented: a problem type with a power utility function with a constant relative risk aversion coefficient and a problem type with an exponential utility function with a constant absolute risk aversion coefficient. The problems can be solved analytically in the unconstrained cases. In order to keep this chapter reasonably self-contained, short introductions to deterministic optimal control theory, stochastic processes, stochastic dynamic systems, and stochastic optimal control theory are given.

Suggested Citation

  • Hans P. Geering & Florian Herzog & Gabriel Dondi, 2010. "Stochastic Optimal Control with Applications in Financial Engineering," Springer Optimization and Its Applications, in: Altannar Chinchuluun & Panos M. Pardalos & Rentsen Enkhbat & Ider Tseveendorj (ed.), Optimization and Optimal Control, pages 375-408, Springer.
    • Handle: RePEc:spr:spochp:978-0-387-89496-6_18
    DOI: 10.1007/978-0-387-89496-6_18
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    Cited by:

    1. Yuqian Xu & Lingjiong Zhu & Michael Pinedo, 2020. "Operational Risk Management: A Stochastic Control Framework with Preventive and Corrective Controls," Operations Research, INFORMS, vol. 68(6), pages 1804-1825, November.
    2. Yang, Ye & Zhang, Youtong & Tian, Jingyi & Li, Tao, 2020. "Adaptive real-time optimal energy management strategy for extender range electric vehicle," Energy, Elsevier, vol. 197(C).
    3. Khemka, Gaurav & Steffensen, Mogens & Warren, Geoffrey J., 2021. "How sub-optimal are age-based life-cycle investment products?," International Review of Financial Analysis, Elsevier, vol. 73(C).

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