Proving Regularity of the Minimal Probability of Ruin via a Game of Stopping and Control

Erhan Bayraktar and Virginia R. Young

Papers from arXiv.org

Abstract: We reveal an interesting convex duality relationship between two problems: (a) minimizing the probability of lifetime ruin when the rate of consumption is stochastic and when the individual can invest in a Black-Scholes financial market; (b) a controller-and-stopper problem, in which the controller controls the drift and volatility of a process in order to maximize a running reward based on that process, and the stopper chooses the time to stop the running reward and rewards the controller a final amount at that time. Our primary goal is to show that the minimal probability of ruin, whose stochastic representation does not have a classical form as does the utility maximization problem (i.e., the objective's dependence on the initial values of the state variables is implicit), is the unique classical solution of its Hamilton-Jacobi-Bellman (HJB) equation, which is a non-linear boundary-value problem. We establish our goal by exploiting the convex duality relationship between (a) and (b).

Date: 2007-04, Revised 2010-08
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Citations: View citations in EconPapers (11)

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Related works:
Journal Article: Proving regularity of the minimal probability of ruin via a game of stopping and control (2011)
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