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Stochastic control methods for optimization problems in Ornstein-Uhlenbeck spread models

Author

Listed:
  • Sahar Albosaily

    (University of Hail, Hail, Saudi Arabia)

  • Serguei M Pergamenchtchikov

    (LMRS - Laboratoire de Mathématiques Raphaël Salem - UNIROUEN - Université de Rouen Normandie - NU - Normandie Université - CNRS - Centre National de la Recherche Scientifique)

Abstract

We develop stochastic optimal control methods for spread financial models defined by the Ornstein-Uhlenbeck (OU) processes. To this end, we study the Hamilton -Jacobi -Bellman (HJB) equation using the Feynman -Kac (FK) probability representation. We show an existence and uniqueness theorem for the classical solution of the HJB equation, a quasi-linear partial derivative equation of parabolic type. Then we show a special verification theorem and, as a consequence, construct optimal consumption/investment strategies for power utility functions. Moreover, using fixed point tools we study the numeric approximation for the HJB solution and we establish the convergence rate which, as it turns out in this case, is super geometric, i.e., more rapid than any geometric one. Finally, we illustrate numerically the behavior of the obtained strategies.

Suggested Citation

  • Sahar Albosaily & Serguei M Pergamenchtchikov, 2023. "Stochastic control methods for optimization problems in Ornstein-Uhlenbeck spread models," Post-Print hal-05723578, HAL.
    • Handle: RePEc:hal:journl:hal-05723578
    DOI: 10.1016/j.jmaa.2023.127668
    Note: View the original document on HAL open archive server: https://hal.science/hal-05723578v1
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