An optimal extraction problem with price impact

Ferrari G, Koch T (2018) Center for Mathematical Economics Working Papers; 603.
Bielefeld: Center for Mathematical Economics.

Diskussionspapier | Veröffentlicht | Englisch
 
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Abstract / Bemerkung
A price-maker company extracts an exhaustible commodity from a reservoir, and sells it instantaneously in the spot market. In absence of any actions of the company, the commodity's spot price evolves either as a drifted Brownian motion or as an Ornstein- Uhlenbeck process. While extracting, the company affects the market price of the commodity, and its actions have an impact on the dynamics of the commodity's spot price. The company aims at maximizing the total expected profits from selling the commodity, net of the total expected proportional costs of extraction. We model this problem as a two-dimensional degenerate singular stochastic control problem with finite fuel. To determine its solution, we construct an explicit solution to the associated Hamilton-Jacobi-Bellman equation, and then verify its actual optimality through a verification theorem. On the one hand, when the (uncontrolled) price is a drifted Brownian motion, it is optimal to extract whenever the current price level is larger or equal than an endogenously determined constant threshold. On the other hand, when the (uncontrolled) price evolves as an Ornstein-Uhlenbeck process, we show that the optimal extraction rule is triggered by a curve depending on the current level of the reservoir. Such a curve is a strictly decreasing C1-function for which we are able to provide an explicit expression. Finally, our study is complemented by a theoretical and numerical analysis of the dependency of the optimal extraction strategy and value function on the model's parameters.

MSC2010 subject classification: 93E20; 49L20; 91B70; 91B76; 60G40. OR/MS subject classification: Dynamic programming/optimal control: applications, Markov; Probability: stochastic models applications, diffusion
Stichworte
singular stochastic finite-fuel control problem; free boundary; variational inequality; optimal extraction; market impact; exhaustible commodity
Erscheinungsjahr
2018
Band
603
ISSN
0931-6558
Page URI
https://pub.uni-bielefeld.de/record/2932622

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Ferrari G, Koch T. An optimal extraction problem with price impact. Center for Mathematical Economics Working Papers. Vol 603. Bielefeld: Center for Mathematical Economics; 2018.
Ferrari, G., & Koch, T. (2018). An optimal extraction problem with price impact (Center for Mathematical Economics Working Papers, 603). Bielefeld: Center for Mathematical Economics.
Ferrari, G., and Koch, T. (2018). An optimal extraction problem with price impact. Center for Mathematical Economics Working Papers, 603, Bielefeld: Center for Mathematical Economics.
Ferrari, G., & Koch, T., 2018. An optimal extraction problem with price impact, Center for Mathematical Economics Working Papers, no.603, Bielefeld: Center for Mathematical Economics.
G. Ferrari and T. Koch, An optimal extraction problem with price impact, Center for Mathematical Economics Working Papers, vol. 603, Bielefeld: Center for Mathematical Economics, 2018.
Ferrari, G., Koch, T.: An optimal extraction problem with price impact. Center for Mathematical Economics Working Papers, 603. Center for Mathematical Economics, Bielefeld (2018).
Ferrari, Giorgio, and Koch, Torben. An optimal extraction problem with price impact. Bielefeld: Center for Mathematical Economics, 2018. Center for Mathematical Economics Working Papers. 603.
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2019-09-06T09:19:04Z
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