Deep Learning for Dynamic Programming with Recursive Utility

We propose the first deep learning algorithm, the Certainty Equivalent Learning (CEL) algorithm, for solving high-dimensional discrete-time dynamic programming problems with recursive utility.

Dynamic programming with recursive utility is numerically challenging because the recursive utility does not have an explicit representation and the Bellman equation contains a certainty equivalent that is difficult to evaluate.

The CEL algorithm learns this certainty-equivalent value directly with neural networks and jointly approximates value functions, policy functions, and certainty-equivalent functions.

The CEL algorithm is mesh-free and simulation-based, allowing high-dimensional state and control spaces, and does not rely on Euler equations, first-order conditions, or differentiability of the state transition function.

The CEL algorithm also works for dynamic programming problems with expected utility as expected utility is a special case of recursive utility.

We apply the CEL to discounted linear exponential quadratic Gaussian control, small-noise robust control, Epstein-Zin DSGE, and multivariate strategic asset allocation problems.

Compared with closed-form and VFI-based benchmarks, the CEL delivers accurate value and policy approximations, remains effective in high-dimensional problems, achieves accuracy comparable to VFI in the small-noise robust-control case, and produces out-of-sample Bellman errors and Euler or first-order residuals that are in the range from 1.0e-4 to 1.0e-3 for most problems.