Stochastic equations with delay: optimal control via BSDEs and regular solutions of Hamilton-Jacobi-Bellman equations

DOI10.1137/080730354zbMATH Open1213.60109arXiv0806.1837OpenAlexW2161582152MaRDI QIDQ3083237FDOQ3083237

Authors: Marco Fuhrman, Federica Masiero, Gianmario Tessitore 

Publication date: 21 March 2011

Published in: SIAM Journal on Control and Optimization (Search for Journal in Brave)

Abstract: We consider an Ito stochastic differential equation with delay, driven by brownian motion, whose solution, by an appropriate reformulation, defines a Markov process $X$ with values in a space of continuous functions $mathbfC$, with generator $mathcalL$. We then consider a backward stochastic differential equation depending on $X$, with unknown processes $(Y,Z)$, and we study properties of the resulting system, in particular we identify the process $Z$ as a deterministic functional of $X$. We next prove that the forward-backward system provides a suitable solution to a class of parabolic partial differential equations on the space $mathbfC$ driven by $mathcalL$, and we apply this result to prove a characterization of the fair price and the hedging strategy for a financial market with memory effects. We also include applications to optimal stochastic control of differential equation with delay: in particular we characterize optimal controls as feedback laws in terms the process $X$.

Full work available at URL: https://arxiv.org/abs/0806.1837

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zbMATH Keywords

backward stochastic differential equationsoptimal stochastic controlquadratic variationstochastic delay differential equations

Mathematics Subject Classification ID

Stochastic calculus of variations and the Malliavin calculus (60H07) Stochastic functional-differential equations (34K50) Applications of stochastic analysis (to PDEs, etc.) (60H30) Optimal stochastic control (93E20)

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