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Let $t\in\mathbb{R}_+$ denote time, $x \in X$ is the state and $u \in U$ the control. The objective function is $F:X \times U \to\mathbb{R}$ and $f:X \times U \to\mathbb{R}$ is the law of motion for the state, i.e. \begin{align} \dot{x}(t) = f(x(t),u(t)) \end{align} Define the value function $v:X\to\mathbb{R}$ by \begin{align} v(x_0):=\max_{\{u(t)\}_{t \geq 0}}\left[\int^\infty_0{e^{-\rho t}F(x(t),u(t))dt}\right] \end{align} where $x_0:=x(0)$ is a given initial condition and $\rho\in\mathbb{R}_{++}$ is a parameter (time preference rate). The Hamilton-Jacobi-Bellman equation in current time reads \begin{align} \rho v(x) = \max_u[F(x,u) + v'(x)f(x,u)] \end{align} which is an ODE. If one can solve for $v(\cdot)$ we can recover the optimal path
\begin{align} \{u^*(t):t\in\mathbb{R}_+\} = \arg\max_{\{u(t)\}_{t \geq 0}}\left[\int^\infty_0{e^{-\rho t}F(x(t),u(t))dt}\right] \end{align} I try to solve the HJB equation by value function iteration. That is guessing an initial value function and then iterate until it converges to the true value. I update via an implicit method a la \begin{align} \frac{v_{j+1}(x_n)-v_j(x_n)}{\Delta} + \rho v_j(x_n) = F(x_n,u^*_n) + v'_{j+1}(x_n)f(x_n,u^*_n) \end{align} where $\Delta$ is a scaling paramter, $j=0,1,2,\ldots$ the number of iterations and $x_n$ an element of the grid of the state space \begin{align} \mathbf{x} := [x_n]_{n=1}^N\in X^N \end{align} and $u_n$ is the solution of \begin{align} u^*_n = \arg\max_u [F(x_n,u_n) + v'_{j+1}(x_n)f(x_n,u_n)] \end{align}

To get an expression for $v'(\cdot)$ we shall define slope coefficients by \begin{align} v'(x_n) :\approx \begin{cases} \displaystyle\frac{v(x_{n+1}) - v(x_n)}{\Delta x}\quad&\text{forward difference}\\[2mm] \displaystyle\frac{v(x_{n+1}) - v(x_{n-1})}{2\Delta x}\quad&\text{central difference}\\[2mm] \displaystyle\frac{v(x_n) - v(x_{n-1})}{\Delta x}\quad&\text{backward difference}\\ \end{cases} \end{align}

where $\Delta x$ denotes the equidistance between the elements of $\mathbf{x}$, i.e. \begin{align} \Delta x:=x_{n+1} - x_n = x_n - x_{n-1}~\forall n \end{align}

Problem

It's known that for forward and backward difference one derivative is missing and for central difference two. We can deal with this issue by a boundary condition on either side. However, consider that there is no boundary condition given. I can still approx $v'(x)$ by a combination of forward, backward and central difference. For instance (case 1) \begin{align} v'(x_n) \approx \begin{cases} \displaystyle\frac{v(x_{n+1}) - v(x_n)}{\Delta x}\quad&n=1\\[2mm] \displaystyle\frac{v(x_{n+1}) - v(x_{n-1})}{2\Delta x}\quad&1 < n <N\\[2mm] \displaystyle\frac{v(x_n) - v(x_{n-1})}{\Delta x}\quad&n=N \end{cases} \end{align}

or (case 2)
\begin{align} v'(x_n) \approx \begin{cases} \displaystyle\frac{v(x_{n+1}) - v(x_n)}{\Delta x}\quad&1\leq n <N\\[2mm] \displaystyle\frac{v(x_n) - v(x_{n-1})}{\Delta x}\quad&n=N \end{cases} \end{align} Note that in the second case $v'(x_{N-1})=v'(x_N)$.

  • I was wondering what's common practice in the math profession.

I'm asking because I get significant different results for the different cases (irrespective of $N$).

PS: Note that I'm neither a mathematician nor a native english speaker. So I apologize for misunderstandigs.

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    $\begingroup$ It really depends what you're doing with $v'$. $\endgroup$ – Ian Jun 24 '15 at 15:48
  • $\begingroup$ I try to iterate a value function until it converges. Updating follows (implicit method) $v_{j+1}(k_n) - v_j(k_n) = f(k_n,v'_{j+1}(k_n),\cdot) $. Therefore I need to approx $v'(k_n)$. $\endgroup$ – clueless Jun 24 '15 at 16:24
  • $\begingroup$ Is this an ODE? $\endgroup$ – uranix Jun 24 '15 at 20:39
  • $\begingroup$ I tried to clarify the question by editing my orginial post. $\endgroup$ – clueless Jun 24 '15 at 22:01
  • $\begingroup$ Did you find an answer? $\endgroup$ – Matthew Feb 4 '16 at 22:09
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If you have no further hypotheses, there is no good numerical method to approximate the derivative.

Take for example $$f_n(x)=\frac1n\sin\left(n^2x\right)$$ so $$f'_n(x)=n\sin(n^2x)$$

Note that if you approximate $f$ to $0$ the error is $O(1/n)$, but if you approximate $f'$ to $0'=0$ the error is not even bounded.

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  • $\begingroup$ This is a bit overstated. If you have no derivative bounds, then you can't know how fine your mesh needs to be and can't know how small your machine epsilon has to be. Nevertheless I can make the mesh fine enough and the machine epsilon small enough to handle your function for any particular $n$. For instance, if I take $n=10^{100}$ and make my machine epsilon $10^{-500}$, then I can handle your function just fine (with a small enough step size). $\endgroup$ – Ian Jun 24 '15 at 15:50

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