Stochastic linear-quadratic control with a jump and regime switching on a random horizon

DOI10.3934/MCRF.2022051MaRDI QIDQ6074828zbMATH OpenOpenAlexFDO

Authors Ying Hu, Xiao-Min Shi, Zuo Quan Xu

Publication date 19 September 2023

Published in Mathematical Control and Related Fields (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/2201.06844

zbMATH Keywords

mean-variance hedgingrandom horizonregime switchingstochastic linear-quadratic controlstochastic Riccati equations with jumps

Mathematics Subject Classification ID

Linear-quadratic optimal control problems (49N10) Applications of stochastic analysis (to PDEs, etc.) (60H30) Portfolio theory (91G10) Optimal stochastic control (93E20)

Abstract: In this paper, we study a stochastic linear-quadratic control problem with random coefficients and regime switching on a horizon $[0,Twedgeau]$, where $au$ is a given random jump time for the underlying state process and $T$ is a constant. We obtain an explicit optimal state feedback control and explicit optimal cost value by solving a system of stochastic Riccati equations (SREs) with jumps on $[0,Twedgeau]$. By the decomposition approach stemming from filtration enlargement theory, we express the solution of the system of SREs with jumps in terms of another system of SREs involving only Brownian filtration on the deterministic horizon $[0,T]$. Solving the latter system is the key theoretical contribution of this paper and we establish this for three different cases, one of which seems to be new in the literature. These results are then applied to study a mean-variance hedging problem with random parameters that depend on both Brownian motion and Markov chain. The optimal portfolio and optimal value are presented in closed forms with the aid of a system of linear backward stochastic differential equations with jumps and unbounded coefficients in addition to the SREs with jumps.

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Cited in

(8)

• scientific article; zbMATH DE number 4170796 (Why is no real title available?)
• The linear-quadratic stochastic optimal control problem with random horizon at finite number of events independent of states system
• The linear-quadratic stochastic optimal control problem with random horizon at the finite number of infinitesimal events
• Stochastic Linear-Quadratic Optimal Control Problems with Random Coefficients and Markovian Regime Switching System
• Non-homogeneous stochastic LQ control with regime switching and random coefficients
• Time-inconsistent stochastic linear-quadratic optimal control problem under non-Markovian regime-switching jump-diffusion model
• Comparison theorems for multidimensional BSDEs with jumps and applications to constrained stochastic linear-quadratic control
• Optimal mean-variance portfolio selection under regime-switching-induced stock price shocks

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