Optimal control of an Ornstein-Uhlenbeck diffusion process, with applications

Abstract

<p>The Ornstein-Uhlenbeck diffusion process presents an opportunity for the development of approximation models of many real processes in business and industry because it is the continuous analog of the first order autoregressive process. The Ornstein-Uhlenbeck process has two decision variables: one relates to the target level of the process trajectory, and the other relates to the dispersion of the process sample paths. An optimization model of the process is developed, which includes holding or carrying costs, control costs and penalty costs. The penalty costs are related to the nearness of the process trajectory to reflecting barriers which are included in the model.</p>