Singular FBSDEs and scalar conservation laws driven by diffusion processes (Q377517)

This paper is a contribution to the theory of fully-coupled forward-backward stochastic differential equations (FBSDEs). Motivated by the analysis of mathematical models of the \(CO_2\) emission markets, the authors are interested in the case of forward processes having a one-dimensional component \(E_t\) with bounded variations, and a backward component having a terminal value given by a monotone function of \(E_t\). The general models for which a unique solvability result can be proved are proposed while, at the same time, the pathological behavior of the solution near and at the threshold is carefully investigated. When the forward diffusion process driving the model is non-degenerate, it is shown that there always exists a set of strictly positive probability of scenarii for which the degenerate component ends exactly at the threshold. The analysis of the model is strongly connected with the standard theory of hyperbolic PDEs: the FBSDE model appears as a stochastic perturbation of a first-order conservation law. When the terminal condition is binary, it is also shown that the flow property of the forward component of the solution can fail at the terminal time.