Resource allocation with stochastic optimal control approach

Haleh Valian (), Mohsen A. Jafari () and Davood Golmohammadi ()
Additional contact information
Haleh Valian: Biogen Idec
Mohsen A. Jafari: Rutgers University
Davood Golmohammadi: University of Massachusetts Boston

Annals of Operations Research, 2016, vol. 239, issue 2, No 14, 625-641

Abstract: Abstract A control-theoretic decision making system is proposed for an agent (decision maker) to “optimally” allocate and deploy his/her resources over time among a dynamically changing list of opportunities (e.g., financial assets), in an uncertain market environment. The solution is a sequence of actions with the objective of optimizing total reward function. This control-theoretic approach is unique in a sense that it solves the problem at distinct time epochs over a finite time horizon and strategies are discovered directly. Rather than basing a decision making system on forecasts or training via a reinforcement learning algorithm using current state data, we train our system via a Q-learning algorithm using Geometric Brownian Motion as an asset price function. While the above problem is quite general, we focus solely on the problem of dynamic financial portfolio management with the objective of maximizing the expected utility for a given risk level. The performance functions that we consider for our system are realized mean return, drawdown and standard deviation. We find that our model achieves a better return and drawdown compared to a known market index as a benchmark.

Keywords: Decision system; Optimization; Resource allocation; Stochastic (search for similar items in EconPapers)
Date: 2016
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DOI: 10.1007/s10479-014-1653-z

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