A new Mertens decomposition of Y^g , -submartingale systems. Application to BSDEs with weak constraints at stopping times

DOI10.1016/J.SPA.2023.07.006MaRDI QIDQ6072905zbMATH OpenOpenAlexFDO

Authors Roxana Dumitrescu, Romuald Elie, Wissal Sabbagh, Chao Zhou

Publication date 15 September 2023

Published in Stochastic Processes and their Applications (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/1708.05957

zbMATH Keywords

BSDEs with weak constraints at stopping timesMertens decompositionoptimal controloptimal stoppingstochastic gamestochastic target

Mathematics Subject Classification ID

Applications of operator theory in optimization, convex analysis, mathematical programming, economics (47N10) Martingales and classical analysis (60G46) Applications of stochastic analysis (to PDEs, etc.) (60H30) Stochastic games, stochastic differential games (91A15) Optimal stochastic control (93E20)

Abstract: We first introduce the concept of $mathscr{Y}^{g,xi}$-submartingale systems, where the nonlinear operator $mathscr{Y}^{g,xi}$ corresponds to the first component of the solution of a reflected BSDE with generator $g$ and lower obstacle $xi$. We first show that, in the case of a left-limited right-continuous obstacle, any $mathscr{Y}^{g,xi}$-submartingale system can be aggregated by a process which is right-lower semicontinuous. We then prove a extit{Mertens decomposition}, by using an original approach which does not make use of the standard penalization technique. These results are in particular useful for the treatment of control/stopping game problems and, to the best of our knowledge, they are completely new in the literature. As an application, we introduce a new class of extit{Backward Stochastic Differential Equations (in short BSDEs) with weak constraints at stopping times}, which are related to the partial hedging of American options. We study the wellposedness of such equations and, using the $mathscr{Y}^{g,xi}$-Mertens decomposition, we show that the family of minimal time-$t$-values $Y_t$, with $(Y,Z)$ a supersolution of the BSDE with weak constraints, admits a representation in terms of a reflected backward stochastic differential equation.

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Cites work

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Cited in

(1)

• BSDEs with weak terminal condition

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