A Generalized Finite Difference Method for Solving Hamilton–Jacobi–Bellman Equations in Optimal Investment

Jiamian Lin, Xi Li, SingRu (Celine) Hoe and Zhongfeng Yan ()
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Jiamian Lin: Department of Mathematics, Jinan University, Guangzhou 510632, China
Xi Li: Department of Mathematics, Jinan University, Guangzhou 510632, China
SingRu (Celine) Hoe: College of Business, Texas A&M University-Commerce, Commerce, TX 75428, USA
Zhongfeng Yan: Department of Mathematics, Jinan University, Guangzhou 510632, China

Mathematics, 2023, vol. 11, issue 10, 1-20

Abstract: This paper studies the numerical algorithm of stochastic control problems in investment optimization. Investors choose the optimal investment to maximize the expected return under uncertainty. The optimality condition, the Hamilton–Jacobi–Bellman (HJB) equation, satisfied by the value function and obtained by the dynamic programming method, is a partial differential equation coupled with optimization. One of the major computational difficulties is the irregular boundary conditions presented in the HJB equation. In this paper, two mesh-free algorithms are proposed to solve two different cases of HJB equations with regular and irregular boundary conditions. The model of optimal investment under uncertainty developed by Abel is used to study the efficacy of the proposed algorithms. Extensive numerical studies are conducted to test the impact of the key parameters on the numerical efficacy. By comparing the numerical solution with the exact solution, the proposed numerical algorithms are validated.

Keywords: stochastic optimal control; capital investment optimization; Hamilton–Jacobi–Bellman equations; mesh-free method; generalized finite difference method (search for similar items in EconPapers)
JEL-codes: C (search for similar items in EconPapers)
Date: 2023
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