Many practical applications of control require that constraints on the inputs and states of the system be respected, while optimizing some performance criterion. In the presence of model uncertainties or disturbances, for many control applications it suffices to keep the state constraints at least for a prescribed share of the time, as e.g. in building climate control or load mitigation for wind turbines. For such systems, a new control method of Scenario-Based Model Predictive Control (SCMPC) is presented in this paper. It optimizes the control inputs over a finite horizon, subject to robust constraint satisfaction under a finite number of random scenarios of the uncertainty and/or disturbances. While previous approaches have shown to be conservative (i.e. to stay far below the specified rate of constraint violations), the new method is the first to account for the special structure of the MPC problem in order to significantly reduce the number of scenarios. In combination with a new framework for interpreting the probabilistic constraints as average-in-time, rather than pointwise-in-time, the conservatism is eliminated. The presented method retains the essential advantages of SCMPC, namely the reduced computational complexity and the handling of arbitrary probability distributions. It also allows for adopting sample-and-remove strategies, in order to trade performance against computational complexity.
While trading on a financial market, the agents we consider take the performance of their peers into account. By maximizing individual utility subject to investment constraints, the agents may ruin each other even unintentionally so that no equilibrium can exist. However, when the agents are willing to waive little expected utility, an approximated equilibrium can be established. The study of the associated backward stochastic differential equation (BSDE) reveals the mathematical reason for the absence of an equilibrium. Presenting an illustrative counterexample, we explain why such multidimensional quadratic BSDEs may not have solutions despite bounded terminal conditions and in contrast to the one-dimensional case.
We consider the optimal liquidation of a position of stock (long or short) where trading has a temporary market impact on the price. The aim is to minimize both the mean and variance of the order slippage with respect to a benchmark given by the market volume-weighted average price (VWAP). In this setting, we introduce a new model for the relative volume curve which allows simultaneously for accurate data fit, economic justification, and mathematical tractability. Tackling the resulting optimization problem using a stochastic control approach, we derive and solve the corresponding Hamilton-Jacobi-Bellman equation to give an explicit characterization of the optimal trading rate and liquidation trajectory.
We study the exponential utility indifference valuation of a contingent claim B in an incomplete market driven by two Brownian motions. The claim depends on a nontradable asset stochastically correlated with the traded asset available for hedging. We use martingale arguments to provide upper and lower bounds, in terms of bounds on the correlation, for the value VB of the exponential utility maximization problem with the claim B as random endowment. This yields an explicit formula for the indifference value b of B at any time, even with a fairly general stochastic correlation. Earlier results with constant correlation are recovered and extended. The reason why all this works is that, after a transformation to the minimal martingale measure, the value VB enjoys a monotonicity property in the correlation between tradable and nontradable assets.
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