Deterministic equivalence in stochastic infinite horizon problems

Deterministic equivalence in stochastic infinite horizon problems

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Article ID: iaor1991282
Country: United States
Volume: 15
Start Page Number: 396
End Page Number: 407
Publication Date: Jan 1990
Journal: Mathematics of Operations Research
Authors: , ,
Abstract:

The authors consider a general infinite horizon problem with stochastic data. They establish conditions under which the stochastic problem may be correctly solved using an equivalent deterministic problem. In particular, the authors establish conditions under which there exists an equivalent interest rate, which permits replacement of the stochastic data by their expectations. This equivalent interest rate can be approximated by a linear function of the ratio of the variance to the mean of the stochastic data. Applications to production planning are included.

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