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Constrained BSDEs representation of the value function in optimal control of pure jump Markov processes

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  • Bandini, Elena
  • Fuhrman, Marco

Abstract

We consider a classical finite horizon optimal control problem for continuous-time pure jump Markov processes described by means of a rate transition measure depending on a control parameter and controlled by a feedback law. For this class of problems the value function can often be described as the unique solution to the corresponding Hamilton–Jacobi-Bellman equation. We prove a probabilistic representation for the value function, known as nonlinear Feynman–Kac formula. It relates the value function with a backward stochastic differential equation (BSDE) driven by a random measure and with a sign constraint on its martingale part. We also prove existence and uniqueness results for this class of constrained BSDEs. The connection of the control problem with the constrained BSDE uses a control randomization method recently developed by several authors. This approach also allows to prove that the value function of the original non-dominated control problem coincides with the value function of an auxiliary dominated control problem, expressed in terms of equivalent changes of probability measures.

Suggested Citation

  • Bandini, Elena & Fuhrman, Marco, 2017. "Constrained BSDEs representation of the value function in optimal control of pure jump Markov processes," Stochastic Processes and their Applications, Elsevier, vol. 127(5), pages 1441-1474.
    • Handle: RePEc:eee:spapps:v:127:y:2017:i:5:p:1441-1474
    DOI: 10.1016/j.spa.2016.08.005
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    References listed on IDEAS

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    2. Elie, Romuald & Kharroubi, Idris, 2010. "Probabilistic representation and approximation for coupled systems of variational inequalities," Statistics & Probability Letters, Elsevier, vol. 80(17-18), pages 1388-1396, September.
    3. Fabien Guilbaud & Huyên Pham, 2013. "Optimal high-frequency trading with limit and market orders," Quantitative Finance, Taylor & Francis Journals, vol. 13(1), pages 79-94, January.
    4. Cosso, Andrea & Fuhrman, Marco & Pham, Huyên, 2016. "Long time asymptotics for fully nonlinear Bellman equations: A backward SDE approach," Stochastic Processes and their Applications, Elsevier, vol. 126(7), pages 1932-1973.
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    7. Pliska, Stanley R., 1975. "Controlled jump processes," Stochastic Processes and their Applications, Elsevier, vol. 3(3), pages 259-282, July.
    8. Confortola, Fulvia & Fuhrman, Marco, 2014. "Backward stochastic differential equations associated to jump Markov processes and applications," Stochastic Processes and their Applications, Elsevier, vol. 124(1), pages 289-316.
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    Cited by:

    1. Bandini, Elena & Cosso, Andrea & Fuhrman, Marco & Pham, Huyên, 2019. "Randomized filtering and Bellman equation in Wasserstein space for partial observation control problem," Stochastic Processes and their Applications, Elsevier, vol. 129(2), pages 674-711.
    2. Bandini, Elena & Russo, Francesco, 2017. "Weak Dirichlet processes with jumps," Stochastic Processes and their Applications, Elsevier, vol. 127(12), pages 4139-4189.
    3. Fuhrman, Marco & Morlais, Marie-Amélie, 2020. "Optimal switching problems with an infinite set of modes: An approach by randomization and constrained backward SDEs," Stochastic Processes and their Applications, Elsevier, vol. 130(5), pages 3120-3153.

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