On time-inconsistent stochastic control in continuous time

DOI10.1007/S00780-017-0327-5MaRDI QIDQ522052zbMATH OpenOpenAlexDBLPWikidataFDO

Authors Mariana Khapko, Agatha Murgoci, Tomas Björk

Publication date 13 April 2017

Published in Finance and Stochastics (Search for Journal in Brave)

Copyright license Creative Commons Attribution 4.0 International

Full work available at URL https://arxiv.org/abs/1612.03650

zbMATH Keywords

Bellman equationdynamic programmingequilibriumhyperbolic discountingmean-variancestochastic controltime-consistencytime-inconsistencytime-inconsistent control

Mathematics Subject Classification ID

Optimality conditions for problems involving randomness (49K45) Dynamic programming in optimal control and differential games (49L20) Hamilton-Jacobi theories (49L99) Applications of optimal control and differential games (49N90) Applications of Brownian motions and diffusion theory (population genetics, absorption problems, etc.) (60J70) Noncooperative games (91A10) Dynamic games (91A25) Dynamic stochastic general equilibrium theory (91B51) Portfolio theory (91G10) Financial applications of other theories (91G80) Optimal stochastic control (93E20)

Abstract: In this paper, which is a continuation of the previously published discrete time paper we develop a theory for continuous time stochastic control problems which, in various ways, are time inconsistent in the sense that they do not admit a Bellman optimality principle. We study these problems within a game theoretic framework, and we look for Nash subgame perfect equilibrium points. For a general controlled continuous time Markov process and a fairly general objective functional we derive an extension of the standard Hamilton-Jacobi-Bellman equation, in the form of a system of non-linear equations, for the determination for the equilibrium strategy as well as the equilibrium value function. As applications of the general theory we study non exponential discounting, various types of mean variance problems, a point process example, as well as a time inconsistent linear quadratic regulator. We also present a study of time inconsistency within the framework of a general equilibrium production economy of Cox-Ingersoll-Ross type.

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