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Stochastic control

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72:: that the optimal control solution in this case is the same as would be obtained in the absence of the additive disturbances. This property is applicable to all centralized systems with linear equations of evolution, quadratic cost function, and noise entering the model only additively; the quadratic assumption allows for the optimal control laws, which follow the certainty-equivalence property, to be linear functions of the observations of the controllers. 958:
In the literature, there are two types of MPCs for stochastic systems; Robust model predictive control and Stochastic Model Predictive Control (SMPC). Robust model predictive control is a more conservative method which considers the worst scenario in the optimization procedure. However, this method,
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In the discrete-time case with uncertainty about the parameter values in the transition matrix (giving the effect of current values of the state variables on their own evolution) and/or the control response matrix of the state equation, but still with a linear state equation and quadratic objective
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matrices. But if they are so correlated, then the optimal control solution for each period contains an additional additive constant vector. If an additive constant vector appears in the state equation, then again the optimal control solution for each period contains an additional additive constant
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chosen at any time, the determinants of the change in wealth are usually the stochastic returns to assets and the interest rate on the risk-free asset. The field of stochastic control has developed greatly since the 1970s, particularly in its applications to finance. Robert Merton used stochastic
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In a discrete-time context, the decision-maker observes the state variable, possibly with observational noise, in each time period. The objective may be to optimize the sum of expected values of a nonlinear (possibly quadratic) objective function over all the time periods from the present to the
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function, a Riccati equation can still be obtained for iterating backward to each period's solution even though certainty equivalence does not apply. The discrete-time case of a non-quadratic loss function but only additive disturbances can also be handled, albeit with more complications.
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final period of concern, or to optimize the value of the objective function as of the final period only. At each time period new observations are made, and the control variables are to be adjusted optimally. Finding the optimal solution for the present time may involve iterating a
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affects the evolution and observation of the state variables. Stochastic control aims to design the time path of the controlled variables that performs the desired control task with minimum cost, somehow defined, despite the presence of this noise. The context may be either
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similar to other robust controls, deteriorates the overall controller's performance and also is applicable only for systems with bounded uncertainties. The alternative method, SMPC, considers soft constraints which limit the risk of violation by a probabilistic inequality.
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If the model is in continuous time, the controller knows the state of the system at each instant of time. The objective is to maximize either an integral of, for example, a concave function of a state variable over a horizon from time zero (the present) to a terminal time
889: 616: 68:. Here the model is linear, the objective function is the expected value of a quadratic form, and the disturbances are purely additive. A basic result for discrete-time centralized systems with only additive uncertainty is the 1027:), dynamic programming is used. There is no certainty equivalence as in the older literature, because the coefficients of the control variables—that is, the returns received by the chosen shares of assets—are stochastic. 232: 343: 664: 971:
context, the state variable in the stochastic differential equation is usually wealth or net worth, and the controls are the shares placed at each time in the various assets. Given the
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of the model, or decentralization of control—causes the certainty equivalence property not to hold. For example, its failure to hold for decentralized control was demonstrated in
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The optimal control solution is unaffected if zero-mean, i.i.d. additive shocks also appear in the state equation, so long as they are uncorrelated with the parameters in the
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matrices is the expected value and variance of each element of each matrix and the covariances among elements of the same matrix and among elements across matrices.
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that deals with the existence of uncertainty either in observations or in the noise that drives the evolution of the system. The system designer assumes, in a
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which is known as the discrete-time dynamic Riccati equation of this problem. The only information needed regarding the unknown parameters in the
1005: 1127:(1976). "Optimal Stabilization Policies for Stochastic Linear Systems: The Case of Correlated Multiplicative and Additive disturbances". 1036: 1023:
is the main tool of analysis. In the case where the maximization is an integral of a concave function of utility over an horizon (0,
93: 950:. As time evolves, new observations are continuously made and the control variables are continuously adjusted in optimal fashion. 114: 884:{\displaystyle X_{t-1}=Q+\mathrm {E} \left-\mathrm {E} \left\left^{-1}\mathrm {E} \left(B^{\mathsf {T}}X_{t}A\right),} 1402: 1279: 1105: 65: 266: 80: 1009: 1431: 981: 1421: 75:
Any deviation from the above assumptions—a nonlinear state equation, a non-quadratic objective function,
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A typical specification of the discrete-time stochastic linear quadratic control problem is to minimize
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Mitchell, Douglas W. (1990). "Tractable Risk Sensitive Control Based on Approximate Expected Utility".
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Hashemian; Armaou (2017). "Stochastic MPC Design for a Two-Component Granulation Process".
1124: 611:{\displaystyle u_{t}^{*}=-\left^{-1}\mathrm {E} \left(B^{\mathsf {T}}X_{t}A\right)y_{t-1},} 40: 8: 1372:(1991). "A Simplified Treatment of the Theory of Optimal Regulation of Brownian Motion". 446:
distributed through time, so the expected value operations need not be time-conditional.
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Turnovsky, Stephen (1974). "The stability properties of optimal economic policies".
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The maximization, say of the expected logarithm of net worth at a terminal date
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is characterized by removing the time subscripts from its dynamic equation.
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An extremely well-studied formulation in stochastic control is that of
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goes to infinity, can be found by iterating the dynamic equation for
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literature. Influential mathematical textbook treatments were by
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can be used to obtain the optimal control solution at each time,
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Stochastic Controls : Hamiltonian Systems and HJB Equations
1327:"Blockchain Token Economics: A Mean-Field-Type Game Perspective" 946:, or a concave function of a state variable at some future date 96:
backwards in time from the last period to the present period.
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with the symmetric positive definite cost-to-go matrix
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Stochastic Optimal Control and the US Financial Crisis
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Controlled Markov Processes and Viscosity Solutions
260:is the time horizon, subject to the state equation 883: 650: 610: 337: 226: 1413: 1098:Analysis and Control of Dynamic Economic Systems 1219: 338:{\displaystyle y_{t}=A_{t}y_{t-1}+B_{t}u_{t},} 43:-driven fashion, that random noise with known 1267: 1294: 1271:Deterministic and Stochastic Optimal Control 1119: 1117: 356:Ă— 1 vector of observable state variables, 1342: 1229: 1190: 1123: 1037:Backward stochastic differential equation 1392: 1374:Journal of Economic Dynamics and Control 1325:Barreiro-Gomez, J.; Tembine, H. (2019). 1163: 1114: 59: 1414: 1252: 1088: 1086: 1084: 1082: 854: 796: 752: 709: 565: 505: 200: 167: 77:noise in the multiplicative parameters 1393:Yong, Jiongmin; Zhou, Xun Yu (1999). 1368: 1309: 1303: 917:The steady-state characterization of 1092: 929:repeatedly until it converges; then 1079: 1004:. These techniques were applied by 967:In a continuous time approach in a 954:Stochastic model predictive control 410:matrix of control multipliers, and 13: 1362: 936: 839: 783: 737: 694: 550: 490: 120: 14: 1443: 364:Ă— 1 vector of control variables, 66:linear quadratic Gaussian control 1268:Fleming, W.; Rishel, R. (1975). 625:evolving backwards in time from 86: 1318: 1295:Fleming, W.; Soner, M. (2006). 1288: 1261: 1246: 1213: 1184: 1157: 1068: 821: 787: 402:realization of the stochastic 70:certainty equivalence property 1: 1062: 962: 444:independently and identically 81:Witsenhausen's counterexample 16:Probabilistic optimal control 1386:10.1016/0165-1889(91)90037-2 1178:10.1016/0264-9993(90)90018-Y 252:, superscript T indicates a 7: 1344:10.1109/ACCESS.2019.2917517 1075:Definition from Answers.com 1030: 1010:financial crisis of 2007–08 450:Induction backwards in time 10: 1448: 1130:Review of Economic Studies 988:changed the nature of the 980:of safe and risky assets. 103: 18: 1194:American Economic Review 245:operator conditional on 45:probability distribution 1255:Continuous Time Finance 1253:Merton, Robert (1990). 651:{\displaystyle X_{S}=Q} 387:state transition matrix 94:matrix Riccati equation 1397:. New York: Springer. 1052:Multiplier uncertainty 885: 652: 612: 339: 228: 150: 21:Stochastic programming 1310:Stein, J. L. (2012). 1057:Stochastic scheduling 1000:, and by Fleming and 886: 653: 613: 340: 229: 130: 60:Certainty equivalence 1432:Stochastic processes 665: 629: 459: 267: 115: 41:Bayesian probability 1314:. Springer-Science. 1240:2017arXiv170404710H 1100:. New York: Wiley. 476: 377:realization of the 205: 172: 1422:Stochastic control 1166:Economic Modelling 1125:Turnovsky, Stephen 1042:Stochastic process 978:optimal portfolios 881: 648: 608: 462: 335: 224: 189: 156: 35:is a sub field of 26:Stochastic control 976:control to study 1439: 1408: 1389: 1357: 1356: 1346: 1322: 1316: 1315: 1307: 1301: 1300: 1292: 1286: 1285: 1265: 1259: 1258: 1250: 1244: 1243: 1233: 1222:IEEE Proceedings 1217: 1211: 1210: 1188: 1182: 1181: 1161: 1155: 1154: 1121: 1112: 1111: 1094:Chow, Gregory P. 1090: 1077: 1072: 973:asset allocation 890: 888: 887: 882: 877: 873: 869: 868: 859: 858: 857: 842: 837: 836: 828: 824: 811: 810: 801: 800: 799: 786: 775: 771: 767: 766: 757: 756: 755: 740: 732: 728: 724: 723: 714: 713: 712: 697: 683: 682: 657: 655: 654: 649: 641: 640: 617: 615: 614: 609: 604: 603: 588: 584: 580: 579: 570: 569: 568: 553: 548: 547: 539: 535: 534: 530: 520: 519: 510: 509: 508: 493: 475: 470: 344: 342: 341: 336: 331: 330: 321: 320: 308: 307: 292: 291: 279: 278: 254:matrix transpose 233: 231: 230: 225: 223: 219: 218: 217: 204: 203: 197: 185: 184: 171: 170: 164: 149: 144: 129: 128: 123: 1447: 1446: 1442: 1441: 1440: 1438: 1437: 1436: 1412: 1411: 1405: 1365: 1363:Further reading 1360: 1337:: 64603–64613. 1323: 1319: 1308: 1304: 1293: 1289: 1282: 1266: 1262: 1251: 1247: 1218: 1214: 1189: 1185: 1162: 1158: 1143:10.2307/2296614 1122: 1115: 1108: 1091: 1080: 1073: 1069: 1065: 1033: 965: 956: 939: 937:Continuous time 864: 860: 853: 852: 848: 847: 843: 838: 829: 806: 802: 795: 794: 790: 782: 781: 777: 776: 762: 758: 751: 750: 746: 745: 741: 736: 719: 715: 708: 707: 703: 702: 698: 693: 672: 668: 666: 663: 662: 636: 632: 630: 627: 626: 593: 589: 575: 571: 564: 563: 559: 558: 554: 549: 540: 515: 511: 504: 503: 499: 498: 494: 489: 488: 484: 483: 471: 466: 460: 457: 456: 397: 372: 326: 322: 316: 312: 297: 293: 287: 283: 274: 270: 268: 265: 264: 251: 240: 213: 209: 199: 198: 193: 180: 176: 166: 165: 160: 155: 151: 145: 134: 124: 119: 118: 116: 113: 112: 106: 89: 62: 54:continuous time 32:optimal control 23: 17: 12: 11: 5: 1445: 1435: 1434: 1429: 1427:Control theory 1424: 1410: 1409: 1403: 1390: 1380:(4): 657–673. 1370:Dixit, Avinash 1364: 1361: 1359: 1358: 1317: 1302: 1287: 1280: 1260: 1245: 1212: 1201:(1): 136–148. 1183: 1172:(2): 161–164. 1156: 1113: 1106: 1078: 1066: 1064: 1061: 1060: 1059: 1054: 1049: 1047:Control theory 1044: 1039: 1032: 1029: 1021:ItĂ´'s equation 964: 961: 955: 952: 938: 935: 892: 891: 880: 876: 872: 867: 863: 856: 851: 846: 841: 835: 832: 827: 823: 820: 817: 814: 809: 805: 798: 793: 789: 785: 780: 774: 770: 765: 761: 754: 749: 744: 739: 735: 731: 727: 722: 718: 711: 706: 701: 696: 692: 689: 686: 681: 678: 675: 671: 647: 644: 639: 635: 619: 618: 607: 602: 599: 596: 592: 587: 583: 578: 574: 567: 562: 557: 552: 546: 543: 538: 533: 529: 526: 523: 518: 514: 507: 502: 497: 492: 487: 482: 479: 474: 469: 465: 393: 368: 346: 345: 334: 329: 325: 319: 315: 311: 306: 303: 300: 296: 290: 286: 282: 277: 273: 249: 243:expected value 238: 235: 234: 222: 216: 212: 208: 202: 196: 192: 188: 183: 179: 175: 169: 163: 159: 154: 148: 143: 140: 137: 133: 127: 122: 105: 102: 88: 85: 61: 58: 37:control theory 15: 9: 6: 4: 3: 2: 1444: 1433: 1430: 1428: 1425: 1423: 1420: 1419: 1417: 1406: 1404:0-387-98723-1 1400: 1396: 1391: 1387: 1383: 1379: 1375: 1371: 1367: 1366: 1354: 1350: 1345: 1340: 1336: 1332: 1328: 1321: 1313: 1306: 1298: 1291: 1283: 1281:0-387-90155-8 1277: 1273: 1272: 1264: 1256: 1249: 1241: 1237: 1232: 1227: 1224:: 4386–4391. 1223: 1216: 1208: 1204: 1200: 1196: 1195: 1187: 1179: 1175: 1171: 1167: 1160: 1152: 1148: 1144: 1140: 1137:(1): 191–94. 1136: 1132: 1131: 1126: 1120: 1118: 1109: 1107:0-471-15616-7 1103: 1099: 1095: 1089: 1087: 1085: 1083: 1076: 1071: 1067: 1058: 1055: 1053: 1050: 1048: 1045: 1043: 1040: 1038: 1035: 1034: 1028: 1026: 1022: 1018: 1013: 1011: 1007: 1003: 999: 995: 991: 987: 986:Black–Scholes 983: 979: 974: 970: 960: 951: 949: 945: 934: 932: 928: 924: 920: 915: 912: 908: 903: 901: 897: 878: 874: 870: 865: 861: 849: 844: 833: 830: 825: 818: 815: 812: 807: 803: 791: 778: 772: 768: 763: 759: 747: 742: 733: 729: 725: 720: 716: 704: 699: 690: 687: 684: 679: 676: 673: 669: 661: 660: 659: 658:according to 645: 642: 637: 633: 624: 605: 600: 597: 594: 590: 585: 581: 576: 572: 560: 555: 544: 541: 536: 531: 527: 524: 521: 516: 512: 500: 495: 485: 480: 477: 472: 467: 463: 455: 454: 453: 451: 447: 445: 441: 437: 433: 429: 425: 421: 417: 413: 409: 405: 401: 396: 392: 388: 386: 382: 376: 371: 367: 363: 359: 355: 351: 332: 327: 323: 317: 313: 309: 304: 301: 298: 294: 288: 284: 280: 275: 271: 263: 262: 261: 259: 255: 248: 244: 220: 214: 210: 206: 194: 190: 186: 181: 177: 173: 161: 157: 152: 146: 141: 138: 135: 131: 125: 111: 110: 109: 101: 97: 95: 87:Discrete time 84: 82: 78: 73: 71: 67: 57: 55: 51: 50:discrete time 46: 42: 38: 34: 33: 27: 22: 1394: 1377: 1373: 1334: 1330: 1320: 1311: 1305: 1296: 1290: 1270: 1263: 1257:. 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Springer. 442:is jointly 379:stochastic 30:stochastic 1416:Categories 1231:1704.04710 1063:References 963:In finance 19:See also: 1353:2169-3536 831:− 734:− 677:− 598:− 542:− 481:− 473:∗ 302:− 132:∑ 1096:(1976). 1031:See also 982:His work 914:vector. 1236:Bibcode 1207:1814888 1151:2296614 1008:to the 994:Fleming 990:finance 969:finance 241:is the 237:where E 104:Example 1401:  1351:  1278:  1205:  1149:  1104:  998:Rishel 422:) and 352:is an 348:where 256:, and 1226:arXiv 1203:JSTOR 1147:JSTOR 1006:Stein 1002:Soner 360:is a 1399:ISBN 1349:ISSN 1276:ISBN 1102:ISBN 996:and 909:and 898:and 438:and 1382:doi 1339:doi 1174:doi 1139:doi 52:or 28:or 1418:: 1378:15 1376:. 1347:. 1333:. 1329:. 1274:. 1234:. 1199:64 1197:. 1168:. 1145:. 1135:43 1133:. 1116:^ 1081:^ 1012:. 430:Ă— 418:Ă— 406:Ă— 389:, 383:Ă— 83:. 56:. 1407:. 1388:. 1384:: 1355:. 1341:: 1335:7 1284:. 1242:. 1238:: 1228:: 1209:. 1180:. 1176:: 1170:7 1153:. 1141:: 1110:. 1025:T 1017:T 948:T 944:T 931:X 927:X 923:S 919:X 911:B 907:A 900:B 896:A 879:, 875:) 871:A 866:t 862:X 855:T 850:B 845:( 840:E 834:1 826:] 822:) 819:R 816:+ 813:B 808:t 804:X 797:T 792:B 788:( 784:E 779:[ 773:] 769:B 764:t 760:X 753:T 748:A 743:[ 738:E 730:] 726:A 721:t 717:X 710:T 705:A 700:[ 695:E 691:+ 688:Q 685:= 680:1 674:t 670:X 646:Q 643:= 638:S 634:X 623:X 606:, 601:1 595:t 591:y 586:) 582:A 577:t 573:X 566:T 561:B 556:( 551:E 545:1 537:] 532:) 528:R 525:+ 522:B 517:t 513:X 506:T 501:B 496:( 491:E 486:[ 478:= 468:t 464:u 440:B 436:A 432:k 428:k 426:( 424:R 420:n 416:n 414:( 412:Q 408:k 404:n 400:t 395:t 391:B 385:n 381:n 375:t 370:t 366:A 362:k 358:u 354:n 350:y 333:, 328:t 324:u 318:t 314:B 310:+ 305:1 299:t 295:y 289:t 285:A 281:= 276:t 272:y 258:S 250:0 247:y 239:1 221:] 215:t 211:u 207:R 201:T 195:t 191:u 187:+ 182:t 178:y 174:Q 168:T 162:t 158:y 153:[ 147:S 142:1 139:= 136:t 126:1 121:E

Index

Stochastic programming
optimal control
control theory
Bayesian probability
probability distribution
discrete time
continuous time
linear quadratic Gaussian control
noise in the multiplicative parameters
Witsenhausen's counterexample
matrix Riccati equation
expected value
matrix transpose
stochastic n Ă— n state transition matrix
independently and identically
Induction backwards in time
finance
asset allocation
optimal portfolios
His work
Black–Scholes
finance
Fleming
Rishel
Soner
Stein
financial crisis of 2007–08
ItĂ´'s equation
Backward stochastic differential equation
Stochastic process

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