EM Algorithm and Stochastic Control in Economics

6 Nov 2016 Steven Kou Xianhua Peng Xingbo Xu

Generalising the idea of the classical EM algorithm that is widely used for computing maximum likelihood estimates, we propose an EM-Control (EM-C) algorithm for solving multi-period finite time horizon stochastic control problems. The new algorithm sequentially updates the control policies in each time period using Monte Carlo simulation in a forward-backward manner; in other words, the algorithm goes forward in simulation and backward in optimization in each iteration... (read more)

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