Effective Approximation Methods for Constrained Utility Maximization with Drift Uncertainty

Dong-Mei Zhu, Harry Zheng

Abstract: In this paper, we propose a novel and effective approximation method for finding the value function for general utility maximization with closed convex control constraints and partial information. Using the separation principle and the weak duality relation, we transform the stochastic maximum principle of the fully observable dual control problem into an equivalent error minimization stochastic control problem and find the tight lower and upper bounds of the value function and its approximate value. Numerical examples show the goodness and usefulness of the proposed method.