Distorted probability operator for dynamic portfolio optimization in times of socio-economic crisis

A robust optimal control of discrete time Markov chains with finite terminal T and bounded costs or wealth using probability distortion is studied. The time inconsistency of these distortion operators and hence its lack of dynamic programming are discussed. Due to that, dynamic versions of these ope...

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Bibliographic Details
Published in:Central European journal of operations research 2023-12, Vol.31 (4), p.1043-1060
Main Authors: Uğurlu, Kerem, Brzeczek, Tomasz
Format: Article
Language:English
Subjects:
Algorithms
Analysis
Business and Management
Distortion
Dynamic programming
Economic aspects
Economic crisis
Economic research
Epidemics
Kazakhstan
Management science
Markov chains
Markov processes
Operations research
Operations Research/Decision Theory
Operators
Optimal control
Optimization
Risk assessment
Risk management
Robust control
Social economics
Stochastic processes
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Summary:A robust optimal control of discrete time Markov chains with finite terminal T and bounded costs or wealth using probability distortion is studied. The time inconsistency of these distortion operators and hence its lack of dynamic programming are discussed. Due to that, dynamic versions of these operators are introduced, and its availability for dynamic programming is demonstrated. Based on dynamic programming algorithm, existence of the optimal policy is justified and an application of the theory to portfolio optimization along with a numerical study is also presented.
ISSN:1435-246X
1613-9178
DOI:10.1007/s10100-022-00834-0