Time-Inconsistent Control Theory with Finance Applications
Description
In dynamic choice problems, time inconsistency is the rule rather than the exception. Indeed, as Robert H. Strotz pointed out in his seminal 1955 paper, relaxing the widely used ad hoc assumption of exponential discounting gives rise to time inconsistency. Other famous examples of time inconsistency include mean-variance portfolio choice and prospect theory in a dynamic context. For such models, the very concept of optimality becomes problematic, as the decision maker's preferences change over time in a temporally inconsistent way. In this book, a time-inconsistent problem is viewed as a non-cooperative game between the agent's current and future selves, with the objective of finding intrapersonal equilibria in the game-theoretic sense. A range of finance applications are provided, including problems with non-exponential discounting, mean-variance objective, time-inconsistent linear quadratic regulator, probability distortion, and market equilibrium with time-inconsistent preferences.
Time-Inconsistent Control Theory with Finance Applications offers the first comprehensive treatment of time-inconsistent control and stopping problems, in both continuous and discrete time, and in the context of finance applications. Intended for researchers and graduate students in the fields of finance and economics, it includes a review of the standard time-consistent results, bibliographical notes, as well as detailed examples showcasing time inconsistency problems. For the reader unacquainted with standard arbitrage theory, an appendix provides a toolbox of material needed for the book.
Reviews / Votes
"The book represents a very valuable contribution to the literature and will surely make the theory of time-inconsistent stochastic control known to a large audience." (Claudio Fontana, zbMATH 1491.91003, 2022)"The book represents a very valuable contribution to the literature and will surely make the theory of time-inconsistent stochastic control known to a large audience." (Claudio Fontana, zbMATH 1491.91003, 2022)
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Agatha Murgoci currently works as a senior quantitative developer at Orsted, a leading off-shore wind energy company. Prior to this, she was an assistant professor at Copenhagen Business School and at Aarhus University, Denmark. She has published papers on time-inconsistent control theory, good deal bounds, convexity corrections, and the dynamics of sovereign and bank CDS spreads. Agatha obtained her PhD in Mathematical Finance from the Stockholm School of Economics, under the supervision of Tomas Bjoerk.
<b>Tomas Bjoerk</b> was a Professor of Mathematical Finance at the Stockholm School of Economics. He was also affiliated with KTH (Royal Institute of Technology), Sweden, and Aarhus University, Denmark. Tomas served as president of the Bachelier Finance Society, co-editor of the journal <i>Mathematical Finance</i>, and a member of the editorial board of <i>Finance and Stochastics</i> and other journals. He published numerous journal articles on mathematical finance, and in particular is known for his research on point process driven forward-rate models, consistent forward-rate curves, general interest-rate theory, finite-dimensional realizations of infinite-dimensional SDEs, good deal bounds, and time-inconsistent control theory. Tomas was the author of the widely used and influential textbook, <i>Arbitrage Theory in Continuous Time</i>, which is now in its fourth edition. He passed away in 2021.
<b>Mariana Khapko</b> is an Assistant Professor of Finance at the University of Toronto, Canada. She is also an affiliated Research Fellow of the Swedish House of Finance at the Stockholm School of Economics. Her research focuses on financial mathematics and financial markets. She has published articles on time-inconsistent control theory, asset pricing and portfolio choice, information in securities markets, and financial market design. Mariana obtained her PhD in Finance from the Stockholm School of Economics, under the supervision of Tomas Bjoerk.
<b>Agatha Murgoci</b> currently works as a senior quantitative developer at Orsted, a leading off-shore wind energy company. Prior to this, she was an assistant professor at Copenhagen Business School and at Aarhus University, Denmark. She has published papers on time-inconsistent control theory, good deal bounds, convexity corrections, and the dynamics of sovereign and bank CDS spreads. Agatha obtained her PhD in Mathematical Finance from the Stockholm School of Economics, under the supervision of Tomas Bjoerk.