Entropy solutions to a strongly degenerate anisotropic convection--diffusion equation with application to utility theory (Q1406983)

The authors study an anisotropic convection-diffusion equation \(\partial_tu = \partial_{xx}^2u + \partial_yf(u),\quad (x,y)\in \mathbb{R}^2, t > 0, \) with an initial condition at \(t = 0\), \(u(\cdot,0) = u_0,\text{ on } \mathbb{R}^2, \) where \(f\in W_{loc}^{1,\infty}\), \(u_0\in L^{\infty}(\mathbb{R}^2)\). This kind of problem arises in the framework of stochastic models for the utility function. At first, the authors prove a local existence result for strong solutions and establish a continuation principle, and produce a counterexample showing that, in general, strong solutions fail to be globally smooth. The so-called discontinuous entropy solutions are considered and the global well posedness of the Cauchy problem is established in this class. Eventually, the authors select a sufficient condition of geometric type which guarantees the continuity of entropy solutions for special initial data. As a byproduct, the existence of an utility process is given, which is a solution to a backward-forward stochastic differential equation, for a given class of final utilites, which is relevant for financial applications.