On the Fourier cosine series expansion method for stochastic control problems

We develop a method for solving stochastic control problems under one-dimensional Levy processes. The method is based on the dynamic programming principle and a Fourier cosine expansion method. Local errors in the vicinity of the domain boundaries may disrupt the algorithm. For efficient computation of matrix-vector products with Hankel and Toeplitz structures, we use a fast Fourier transform algorithm. An extensive error analysis provides new insights based on which we develop an extrapolation method to deal with the propagation of local errors. Copyright (c) 2013 John Wiley & Sons, Ltd.