A new Mertens decomposition of $\mathscr{Y}^{g,\xi}$-submartingale systems. Application to BSDEs with weak constraints at stopping times

Roxana Dumitrescu, Romuald Elie, Wissal Sabbagh and Chao Zhou

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Abstract: We first introduce the concept of $\mathscr{Y}^{g,\xi}$-submartingale systems, where the nonlinear operator $\mathscr{Y}^{g,\xi}$ corresponds to the first component of the solution of a reflected BSDE with generator $g$ and lower obstacle $\xi$. We first show that, in the case of a left-limited right-continuous obstacle, any $\mathscr{Y}^{g,\xi}$-submartingale system can be aggregated by a process which is right-lower semicontinuous. We then prove a \textit{Mertens decomposition}, by using an original approach which does not make use of the standard penalization technique. These results are in particular useful for the treatment of control/stopping game problems and, to the best of our knowledge, they are completely new in the literature. As an application, we introduce a new class of \textit{Backward Stochastic Differential Equations (in short BSDEs) with weak constraints at stopping times}, which are related to the partial hedging of American options. We study the wellposedness of such equations and, using the $\mathscr{Y}^{g,\xi}$-Mertens decomposition, we show that the family of minimal time-$t$-values $Y_t$, with $(Y,Z)$ a supersolution of the BSDE with weak constraints, admits a representation in terms of a reflected backward stochastic differential equation.

Date: 2017-08, Revised 2023-05
New Economics Papers: this item is included in nep-rmg
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