Backward Stochastic Differential Equations and Stochastic Controls : a New Perspective

Kohlmann, Michael; Zhou, Xun Yu

Backward Stochastic Differential Equations and Stochastic Controls : a New Perspective

Dateien

318_1.pdfGröße: 249.68 KBDownloads: 255

Datum

1999

Autor:innen

Kohlmann, Michael

Zhou, Xun Yu

Open Access-Veröffentlichung

Open Access Green

Sammlungen

Mathematik und Statistik

Publikationstyp

Working Paper/Technical Report

Publikationsstatus

Published

Zusammenfassung

It is well known that backward stochastic differential equations (BSDEs) stem from the study on the Pontryagin type maximum principle for optimal stochastic controls. A solution of a BSDE hits a given terminal value (which is a random variable) by virtue of an additional martingale term and an indefinite initial state. This paper attempts to view the relation between BSDEs and stochastic controls from s new perspective by interpreting BSDEs as some stochastic optimal control problems. More specifically, associated with a BSDE a new stochastic control problem is introduced with the same dynamics but a definite initial state.
The martingale term in the original BSDE is regarded as the control and the objective is to minimize the second moment of the difference between the terminal state and the given terminal value. This problem is solved in a closed form by the stochastic linear-quadratic theory developed recently. The general result is then applied to the Black-Scholes model, where an optimal feedback control is obtained explicitly in terms of the option price. Finally, a modified model is investigated where the difference between the state and the expectation of the given terminal value at any time is take into account.

Fachgebiet (DDC)

330 Wirtschaft

Schlagwörter

Backward stochastic differential equation, stochastic control

Zitieren

ISO 690

KOHLMANN, Michael, Xun Yu ZHOU, 1999. Backward Stochastic Differential Equations and Stochastic Controls : a New Perspective

BibTex

@techreport{Kohlmann1999Backw-730,
  year={1999},
  series={CoFE-Diskussionspapiere / Zentrum für Finanzen und Ökonometrie},
  title={Backward Stochastic Differential Equations and Stochastic Controls : a New Perspective},
  number={1999/09},
  author={Kohlmann, Michael and Zhou, Xun Yu}
}

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