Stochastic dominance for sequences and implied utility in dynamic optimization

Darinka Dentcheva, Andrzej Ruszczyński

Research output: Contribution to journalArticlepeer-review

2 Scopus citations

Abstract

We introduce a stochastic dynamic optimization problem, where risk aversion is expressed by a stochastic ordering constraint. The constraint requires that a random reward sequence depending on our decisions dominates a given benchmark random sequence. The dominance is defined by discounting both processes with a family of discount sequences, and by applying a univariate order. We describe the generator of this order. We develop necessary and sufficient conditions of optimality for convex stochastic control problems with the new ordering constraint and we derive an equivalent control problem featuring implied utility functions.

Original languageEnglish (US)
Pages (from-to)15-22
Number of pages8
JournalComptes Rendus de L'Academie Bulgare des Sciences
Volume61
Issue number1
StatePublished - 2008

All Science Journal Classification (ASJC) codes

  • General

Keywords

  • Risk
  • Stochastic control
  • Stochastic orders
  • Stochastic programming
  • Utility

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