A spectral method for an Optimal Investment problem with Transaction Costs under Potential Utility
Provides a more efficient numerical solution for a known financial optimization problem, but the improvement is incremental.
The paper develops a spectral method for solving the finite-horizon Optimal Investment problem with transaction costs under Potential Utility, achieving higher efficiency than finite differences when high precision is required.
This paper concerns the numerical solution of the finite-horizon Optimal Investment problem with transaction costs under Potential Utility. The problem is initially posed in terms of an evolutive HJB equation with gradient constraints. In Finite-Horizon Optimal Investment with Transaction Costs: A Parabolic Double Obstacle Problem, Day-Yi, the problem is reformulated as a non-linear parabolic double obstacle problem posed in one spatial variable and defined in an unbounded domain where several explicit properties and formulas are obtained. The restatement of the problem in polar coordinates allows to pose the problem in one spatial variable in a finite domain, avoiding some of the technical difficulties of the numerical solution of the previous statement of the problem. If high precision is required, the spectral numerical method proposed becomes more efficient than simpler methods as finite differences for example.