Backward stochastic differential equations with regime-switching and sublinear expectations

Engel John C. Dela Vega and Robert J. Elliott

Stochastic Processes and their Applications, 2022, vol. 148, issue C, 278-298

Abstract: This paper introduces a backward stochastic differential equation driven by both Brownian motion and a Markov chain (BSDEBM). Regime-switching is also incorporated through its driver. The existence and uniqueness of the solution of the BSDEBM are proved. A comparison theorem is also derived. Filtration consistent sublinear expectations are defined and characterized as solutions to the BSDEBM. The bid and ask prices are then represented using sublinear expectations.

Keywords: Backward stochastic differential equations; Regime-switching; Markov chains; Brownian motion; Sublinear expectations; Two-price theory (search for similar items in EconPapers)
Date: 2022
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DOI: 10.1016/j.spa.2022.02.012

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