Backward Stackelberg differential game with constraints: a mixed terminal-perturbation and linear-quadratic approach

DOI10.1137/20M1340769zbMATH Open1492.91074arXiv2005.11872MaRDI QIDQ5081091FDOQ5081091

Authors: Xinwei Feng, Ying Hu, Jianhui Huang 

Publication date: 1 June 2022

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

Abstract: We discuss an open-loop backward Stackelberg differential game involving single leader and single follower. Unlike most Stackelberg game literature, the state to be controlled is characterized by a backward stochastic differential equation (BSDE) for which the terminal- instead initial-condition is specified as a priori; the decisions of leader consist of a static terminal-perturbation and a dynamic linear-quadratic control. In addition, the terminal control is subject to (convex-closed) pointwise and (affine) expectation constraints. Both constraints are arising from real applications such as mathematical finance. For information pattern: the leader announces both terminal and open-loop dynamic decisions at the initial time while takes account the best response of follower. Then, two interrelated optimization problems are sequentially solved by the follower (a backward linear-quadratic (BLQ) problem) and the leader (a mixed terminal-perturbation and backward-forward LQ (BFLQ) problem). Our open-loop Stackelberg equilibrium is represented by some coupled backward-forward stochastic differential equations (BFSDEs) with mixed initial-terminal conditions. Our BFSDEs also involve nonlinear projection operator (due to pointwise constraint) combining with a Karush-Kuhn-Tucker (KKT) system (due to expectation constraint) via Lagrange multiplier. The global solvability of such BFSDEs is also discussed in some nontrivial cases. Our results are applied to one financial example.

Full work available at URL: https://arxiv.org/abs/2005.11872

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zbMATH Keywords

backward stochastic differential equationStackelberg gameKarush-Kuhn-Tucker systembackward linear-quadratic controlpointwise and affine constraintsterminal perturbation

Mathematics Subject Classification ID

Differential games and control (49N70) Stochastic ordinary differential equations (aspects of stochastic analysis) (60H10) Linear-quadratic optimal control problems (49N10) Hierarchical games (including Stackelberg games) (91A65) Optimal stochastic control (93E20)

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Cited In (10)

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