Dynamic Optimization with Timing Risk

Abstract

Timing risk refers to a situation in which the timing of an economically important event is unknown (risky) from the perspective of an economic decision maker. While this special class of dynamic stochastic control problems has many applications in economics, the methods used to solve them are not easily accessible within a single, comprehensive survey. We provide a survey of dynamic optimization methods under comprehensive assumptions about the nature of timing risk. We also relax the assumption of full information and summarize optimization with limited information, ambiguity, imperfect hedging, and dynamic inconsistency. Our goal is to provide a concise user guide for specialists and nonspecialists alike.