Stochastic target games and dynamic programming via regularized viscosity solutions

DOI10.1287/MOOR.2015.0718zbMATH Open1334.93178arXiv1307.5606OpenAlexW1825269578MaRDI QIDQ2800366FDOQ2800366

Marcel Nutz, Bruno Bouchard

Publication date: 15 April 2016

Published in: Mathematics of Operations Research (Search for Journal in Brave)

Abstract: We study a class of stochastic target games where one player tries to find a strategy such that the state process almost-surely reaches a given target, no matter which action is chosen by the opponent. Our main result is a geometric dynamic programming principle which allows us to characterize the value function as the viscosity solution of a non-linear partial differential equation. Because abstract mea-surable selection arguments cannot be used in this context, the main obstacle is the construction of measurable almost-optimal strategies. We propose a novel approach where smooth supersolutions are used to define almost-optimal strategies of Markovian type, similarly as in ver-ification arguments for classical solutions of Hamilton--Jacobi--Bellman equations. The smooth supersolutions are constructed by an exten-sion of Krylov's method of shaken coefficients. We apply our results to a problem of option pricing under model uncertainty with different interest rates for borrowing and lending.

Full work available at URL: https://arxiv.org/abs/1307.5606

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zbMATH Keywords

Knightian uncertaintyviscosity solutionstochastic differential gamestochastic targetshaking of coefficients

Mathematics Subject Classification ID

Statistical methods; risk measures (91G70) Dynamic programming (90C39) Differential games (aspects of game theory) (91A23) Dynamic programming in optimal control and differential games (49L20) Interest rates, asset pricing, etc. (stochastic models) (91G30) Optimal stochastic control (93E20)

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Cited In (12)

• Model-Independent Bounds for Asian Options: A Dynamic Programming Approach
• Asymptotic Perron's Method and Simple Markov Strategies in Stochastic Games and Control
• On the controller-stopper problems with controlled jumps
• On a Class of Path-Dependent Singular Stochastic Control Problems
• Second-Order Stochastic Target Problems with Generalized Market Impact
• Stochastic Target Problems, Dynamic Programming, and Viscosity Solutions
• Stochastic control for a class of nonlinear kernels and applications
• Stochastic Perron for stochastic target games
• Stochastic Perron for stochastic target problems
• Zero-sum path-dependent stochastic differential games in weak formulation
• Dynamic programming principle for stochastic recursive optimal control problem driven by a \(G\)-Brownian motion
• Hedging of Covered Options with Linear Market Impact and Gamma Constraint

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