Time-Inconsistent Stochastic Linear--Quadratic Control: Characterization and Uniqueness of Equilibrium

Ying Hu, Hanqing Jin and Xun Yu Zhou
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Ying Hu: IRMAR

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Abstract: In this paper, we continue our study on a general time-inconsistent stochastic linear--quadratic (LQ) control problem originally formulated in [6]. We derive a necessary and sufficient condition for equilibrium controls via a flow of forward--backward stochastic differential equations. When the state is one dimensional and the coefficients in the problem are all deterministic, we prove that the explicit equilibrium control constructed in \cite{HJZ} is indeed unique. Our proof is based on the derived equivalent condition for equilibria as well as a stochastic version of the Lebesgue differentiation theorem. Finally, we show that the equilibrium strategy is unique for a mean--variance portfolio selection model in a complete financial market where the risk-free rate is a deterministic function of time but all the other market parameters are possibly stochastic processes.

Date: 2015-04, Revised 2015-05
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