TY - JOUR
T1 - Distorted probability operator for dynamic portfolio optimization in times of socio-economic crisis
AU - Uğurlu, Kerem
AU - Brzeczek, Tomasz
N1 - Funding Information:
Kerem Uğurlu is the first author of the manuscript. Kerem Uğurlu has been financially supported by Nazarbayev University under the Project SSH2020016 “Robust Methods in Financial Mathematics and Stochastic Control” during the preparation of this manuscript. There is no conflict of interest between the authors of this manuscript.
Publisher Copyright:
© 2022, The Author(s).
PY - 2022
Y1 - 2022
N2 - A robust optimal control of discrete time Markov chains with finite terminal T and bounded costs or wealth using probability distortion is studied. The time inconsistency of these distortion operators and hence its lack of dynamic programming are discussed. Due to that, dynamic versions of these operators are introduced, and its availability for dynamic programming is demonstrated. Based on dynamic programming algorithm, existence of the optimal policy is justified and an application of the theory to portfolio optimization along with a numerical study is also presented.
AB - A robust optimal control of discrete time Markov chains with finite terminal T and bounded costs or wealth using probability distortion is studied. The time inconsistency of these distortion operators and hence its lack of dynamic programming are discussed. Due to that, dynamic versions of these operators are introduced, and its availability for dynamic programming is demonstrated. Based on dynamic programming algorithm, existence of the optimal policy is justified and an application of the theory to portfolio optimization along with a numerical study is also presented.
KW - Dynamic programming
KW - Markov decision processes
KW - Mathematical finance
KW - Probability distortion
KW - Risk management
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U2 - 10.1007/s10100-022-00834-0
DO - 10.1007/s10100-022-00834-0
M3 - Article
AN - SCOPUS:85143591123
SN - 1435-246X
JO - Central European Journal of Operations Research
JF - Central European Journal of Operations Research
ER -