Representation of solutions to BSDEs associated with a degenerate FSDE (Q2572394)

This paper considers the decoupled forward-backward system of stochastic differential equations \[ X_t= x+ \int^t_0 b(r,X_r)\,dr+ \int^t_0\sigma(r, X_r)\,dW_r, \] \[ Y_t= g(X_T)+ \int^T_t f(r, X_r, Y_r, Z_r)\,dr- \int^T_t Z_r dW_r \] (where \(W\) is a standard Brownian motion, and \(\sigma\), \(b\), \(f\), \(g\) are deterministic functions) which arises in finance theory. Under less restrictive hypotheses that allow \(\sigma\) to be degenerate and \(g\) to be discontinuous, it is proved that \(Z_t\) is continuous for \(t<\tau\) and \(Z_t= 0\) for \(t\geq\tau\). Also, an estimate is obtained for \(Z_t\) when \(t<\tau\).