On the smoothness of solutions of linear-quadratic regulator for degenerate diffusions (Q1780376)

The author is concerned with the quadratic control problem to minimize the expected cost with discount factor \(\beta > 0\): \[ J(c)=E\left[\int_0^\infty e^{-\beta t}\{h(x_t) +| c_t| ^2\}\,dt\right] \] over \(c\in\mathcal A\) subject to the degenerate stochastic differential equation \[ dx_t = [Ax_t + c_t]\,dt + \sigma x_t\,dw_t,\quad x_0 = x\in\mathbb R,\quad t\geq 0, \] for non-zero constants \(A\), \(\sigma\neq 0\), and a continuous function \(h\) on \(\mathbb R\), where \(w_t\) is a one-dimensional standard Brownian motion on a complete probability space \((\Omega,\mathcal F, P)\) endowed with the natural filtration \(\mathcal F_t\) generated by \(\sigma(w_s, s\leq t)\), and \(\mathcal A\) denotes the class of all \(\mathcal F_t\)-progressively measurable processes \(c = (c_t)\) with \(J(c) < \infty\). It is assumed that \(h\) satisfies the following properties: \(h(x)\geq 0\) convex and there exists \(C>0\) such that \(h(x)\leq C(1 + | x| ^n)\), \(x\in\mathbb R\), \(n\geq2\). The purpose of this paper is to show the existence of a smooth solution \(u\) of the associated Hamilton-Jacobi-Bellman (in short, HJB) equation of the form: \[ -\beta u +\frac{1}{2}\sigma^2x^2u'' + Axu' + \min_{r\in\mathbb R}(r^2 + ru') + h(x) = 0\quad \text{in}\,\mathbb R,\tag{1} \] and to give a synthesis of optimal control. The author establishes the existence of a classical solution of the degenerate HJB equation (1) associated with this problem by the technique of viscosity solutions, and hence derives an optimal control from the optimality conditions in the HJB equation.