A Numerical Method for Solving Stochastic Optimal Control Problems with Linear Control

  • Authors:

  • Walailuck Chavanasporn;Christian-Oliver Ewald

  • Affiliations:

  • School of Economics and Finance, University of St. Andrews, St. Andrews, Fife, UK KY16 9AL;School of Mathematics and Statistics, University of Sydney, Camperdown, Australia and Center for Dynamic Macro Economic Analysis, University of St. Andrews, St. Andrews, Fife, UK

  • Venue:
  • Computational Economics
  • Year:
  • 2012

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Abstract

We introduce a numerical method to solve stochastic optimal control problems which are linear in the control. We facilitate the idea of solving two-point boundary value problems with spline functions in order to solve the resulting dynamic programming equation. We then show how to effectively reduce the dimension in the proposed algorithm, which improves computational time and memory constraints. An example, motivated as an invest problem with uncertain cost, is provided, and the effectiveness of our method demonstrated.