An optimal extraction problem with price impact
Ferrari, Giorgio
Ferrari
Giorgio
Koch, Torben
Koch
Torben
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
603
Center for Mathematical Economics
2018
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