Fast Upper-Envelope Scan for Discrete-Continuous Dynamic Programming

42 Pages Posted: 12 Aug 2022 Last revised: 22 Oct 2024

See all articles by Loretti Dobrescu

Loretti Dobrescu

UNSW Australia Business School, School of Economics

Akshay Shanker

Australian National University (ANU) - Crawford School of Public Policy

Date Written: August 4, 2022

Abstract

We develop a general fast upper envelope scan method to solve any stochastic
dynamic models with discrete-continuous choices where the optimization problem
has a one-dimensional representation. For this vast class of models, FUES enables
the endogenous grid method by efficiently selecting the optimal solution using a targeted
secant scan. Importantly, it does so without requiring either monotonicity of the
policy function or analytical information on the value function gradient. We demonstrate
our method using several workhorse applications in the literature, and show
the massive computational speed and accuracy gains generated across the board, even
when uncertainty may lead to highly complex endogenous grids of potential solution
points.

Keywords: discrete and continuous choices, non-convex optimization, Euler equation, dynamic programming

JEL Classification: C13, C63, D91

Suggested Citation

Dobrescu, Loretti Isabella and Shanker, Akshay, Fast Upper-Envelope Scan for Discrete-Continuous Dynamic Programming (August 4, 2022). UNSW Business School Research Paper Forthcoming, Available at SSRN: https://ssrn.com/abstract=4181302 or http://dx.doi.org/10.2139/ssrn.4181302

Loretti Isabella Dobrescu

UNSW Australia Business School, School of Economics ( email )

High Street
Sydney, NSW 2052
Australia

Akshay Shanker (Contact Author)

Australian National University (ANU) - Crawford School of Public Policy ( email )

ANU College of Asia and the Pacific
J.G. Crawford Building, #132, Lennox Crossing
Canberra, Australian Capital Territory 0200
Australia

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