Shape-preserving dynamic programming

Yongyang Cai and Kenneth Judd

Mathematical Methods of Operations Research, 2013, vol. 77, issue 3, 407-421

Abstract: Dynamic programming is the essential tool in dynamic economic analysis. Problems such as portfolio allocation for individuals and optimal growth of national economies are typical examples. Numerical methods typically approximate the value function and use value function iteration to compute the value function for the optimal policy. Polynomial approximations are natural choices for approximating value functions when we know that the true value function is smooth. However, numerical value function iteration with polynomial approximations is unstable because standard methods such as interpolation and least squares fitting do not preserve shape. We introduce shape-preserving approximation methods that stabilize value function iteration, and are generally faster than previous stable methods such as piecewise linear interpolation. Copyright Springer-Verlag 2013

Keywords: Numerical dynamic programming; Shape-preserving approximation; Multi-stage decision-making problems; Value function iteration (search for similar items in EconPapers)
Date: 2013
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DOI: 10.1007/s00186-012-0406-5

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