Stochastic control for a class of nonlinear kernels and applications

Dylan Possama\"i, Xiaolu Tan and Chao Zhou

Papers from arXiv.org

Abstract: We consider a stochastic control problem for a class of nonlinear kernels. More precisely, our problem of interest consists in the optimisation, over a set of possibly non-dominated probability measures, of solutions of backward stochastic differential equations (BSDEs). Since BSDEs are nonlinear generalisations of the traditional (linear) expectations, this problem can be understood as stochastic control of a family of nonlinear expectations, or equivalently of nonlinear kernels. Our first main contribution is to prove a dynamic programming principle for this control problem in an abstract setting, which we then use to provide a semi-martingale characterisation of the value function. We next explore several applications of our results. We first obtain a wellposedness result for second order BSDEs (as introduced in [86]) which does not require any regularity assumption on the terminal condition and the generator. Then we prove a nonlinear optional decomposition in a robust setting, extending recent results of [71], which we then use to obtain a super-hedging duality in uncertain, incomplete and nonlinear financial markets. Finally, we relate, under additional regularity assumptions, the value function to a viscosity solution of an appropriate path-dependent partial differential equation (PPDE).

Date: 2015-10, Revised 2017-07
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Citations: View citations in EconPapers (3)

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