Solving a savings allocation problem by numerical dynamic programming with shape-preserving interpolation

Solving a savings allocation problem by numerical dynamic programming with shape-preserving interpolation

0.00 Avg rating0 Votes
Article ID: iaor2001771
Country: United Kingdom
Volume: 27
Issue: 5
Start Page Number: 399
End Page Number: 408
Publication Date: Apr 2000
Journal: Computers and Operations Research
Authors: ,
Keywords: programming: dynamic, financial
Abstract:

This article introduces a bivariate shape-preserving interpolation algorithm to approximate the value function of a dynamic program. First, we present a savings allocation problem between a pension account and another non-pension one. With the objective of maximizing the present value of utility over a life cycle, the investor can distribute his or her savings, in each account, between stocks and cash funds. Formally, this complex problem involved with various tax rules is in dynamic programming formulation and can only be solved numerically. It is known that the value function of the associated two-dimensional dynamic program inherits monotonicity and convexity of the investor's risk-averse utility function. To preserve these shape characteristics, we apply a bivariate shape-preserving interpolation algorithm in the successive approximation of the value function. Finally, we have computational results for this savings allocation problem, showing that the proposed shape-preserving interpolation method is superior to other dynamic programming methods with less sophisticated interpolation techniques.

Reviews

Required fields are marked *. Your email address will not be published.