Splitting multidimensional BSDEs and finding local equilibria

Christoph Frei

Stochastic Processes and their Applications, 2014, vol. 124, issue 8, 2654-2671

Abstract: We introduce a new notion of local solution of backward stochastic differential equations (BSDEs) and prove that multidimensional quadratic BSDEs are locally but not globally solvable. Applied in a financial context on optimal investment, our results show that there exist local but no global equilibria when agents take both the absolute and the relative performance compared to their peers into account.

Keywords: Multidimensional BSDE; Quadratic generator; Splitting BSDEs; Relative performance; Local equilibrium (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (18)

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DOI: 10.1016/j.spa.2014.03.004

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