Weak equilibria for time‐inconsistent control: With applications to investment‐withdrawal decisions

DOI10.1111/MAFI.12391MaRDI QIDQ6146679zbMATH OpenOpenAlexFDO

Authors Zongxia Liang, Fengyi Yuan

Publication date 31 January 2024

Published in Mathematical Finance (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/2105.06607

zbMATH Keywords

extended HJB systemsophisticated decision makersstopping-control problemstime-inconsistencyweak equilibria

Mathematics Subject Classification ID

Decision theory (91B06) Financial markets (91G15)

Abstract: This paper considers time-inconsistent problems when control and stopping strategies are required to be made simultaneously (called stopping control problems by us). We first formulate the timeinconsistent stopping control problems under general multi-dimensional controlled diffusion model and propose a formal definition of their equilibria. We show that an admissible pair $(hatu,C)$ of controlstopping policy is equilibrium if and only if the auxiliary function associated with it solves the extended HJB system, providing a methodology to verify or exclude equilibrium solutions. We provide several examples to illustrate applications to mathematical finance and control theory. For a problem whose reward function endogenously depends on the current wealth, the equilibrium is explicitly obtained. For another model with a non-exponential discount, we prove that any constant proportion strategy can not be equilibrium. We further show that general non-constant equilibrium exists and is described by singular boundary value problems. This example shows that considering our combined problems is essentially different from investigating them separately. In the end, we also provide a two-dimensional example with a hyperbolic discount.

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Cited in

(3)

• Equilibria of time‐inconsistent stopping for one‐dimensional diffusion processes
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• A subgame perfect equilibrium reinforcement learning approach to time-inconsistent problems

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