Computational Methods and Verification Theorem for Portfolio-Consumption Optimization under Exponential O-U Dynamics

Abstract

In this paper, we focus on the problem of optimal portfolio-consumption policies in a multi-asset financial market, where the n risky assets follow Exponential Ornstein-Uhlenbeck processes, along with one risk-free bond. The investor's preferences are modeled using Constant Relative Risk Aversion utility with state-dependent stochastic discounting. The problem can be formulated as a high-dimensional stochastic optimal control problem, wherein the associated value function satisfies a Hamilton-Jacobi-Bellman (HJB) equation, which constitutes a necessary condition for optimality. We apply a variable separation technique to transform the HJB equation to a system of ordinary differential equations (ODEs). Then a class of hybrid numerical approaches that integrate exponential Rosenbrock-type methods with Runge-Kutta methods is proposed to solve the ODE system. More importantly, we establish a rigorous verification theorem that provides sufficient conditions for the existence of value function and admissible optimal control, which can be verified numerically. A series of experiments are performed, demonstrating that our proposed method outperforms the conventional grid-based method in both accuracy and computational cost. Furthermore, the numerically derived optimal policy achieves superior performance over all other considered admissible policies.