Abstract
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.
| Original language | English |
|---|---|
| Journal | Central European Journal of Operations Research |
| DOIs | |
| Publication status | Accepted/In press - 2022 |
Funding
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.
Keywords
- Dynamic programming
- Markov decision processes
- Mathematical finance
- Probability distortion
- Risk management
ASJC Scopus subject areas
- Management Science and Operations Research
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