Equilibrium strategies for time-inconsistent stochastic switching systems
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equilibrium strategyHamilton-Jacobi-Bellman equationstochastic optimal controlstochastic switching diffusiontime-inconsistency
Stochastic ordinary differential equations (aspects of stochastic analysis) (60H10) Control/observation systems governed by ordinary differential equations (93C15) Control/observation systems governed by functional relations other than differential equations (such as hybrid and switching systems) (93C30) Optimal stochastic control (93E20)
Abstract: An optimal control problem is considered for a stochastic differential equation containing a state-dependent regime switching, with a recursive cost functional. Due to the non-exponential discounting in the cost functional, the problem is time-inconsistent in general. Therefore, instead of finding a global optimal control (which is not possible), we look for a time-consistent (approximately) locally optimal equilibrium strategy. Such a strategy can be represented through the solution to a system of partial differential equations, called an equilibrium Hamilton-Jacob-Bellman (HJB, for short) equation which is constructed via a sequence of multi-person differential games. A verification theorem is proved and, under proper conditions, the well-posedness of the equilibrium HJB equation is established as well.
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