Optimal feedback control of stock prices under credit risk dynamics

Jinghai Shao, Sovan Mitra () and Andreas Karathanasopoulos
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Jinghai Shao: Tianjin University
Sovan Mitra: University of Westminster, School of Finance and Accounting
Andreas Karathanasopoulos: University of Dubai

Annals of Operations Research, 2022, vol. 313, issue 2, No 29, 1285-1318

Abstract: Abstract In this paper we provide a stock price model that explicitly incorporates credit risk, under a stochastic optimal control system. The stock price model also incorporates the managerial control of credit risk through a control policy in the stochastic system. We provide explicit conditions on the existence of optimal feedback controls for the stock price model with credit risk. We prove the continuity of the value function, and then prove the dynamic programming principle for our system. Finally, we prove the Viscosity Solution of the Hamilton–Jacobi–Bellman equation. This paper is particularly relevant to industry, as the impact of credit risk upon stock prices has been prominent since the commencement of the Global Financial Crisis.

Keywords: Credit risk; Stock price model; Optimal control; Regime switching; Financial crisis; 93B52; 60J60; 49K30; 60J27 (search for similar items in EconPapers)
Date: 2022
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DOI: 10.1007/s10479-021-04002-6

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