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January  2015, 11(1): 27-40. doi: 10.3934/jimo.2015.11.27

Stochastic maximum principle for non-zero sum differential games of FBSDEs with impulse controls and its application to finance

1. 

School of Mathematics, Shandong University, Jinan 250100, China, China

Received  January 2013 Revised  November 2013 Published  May 2014

This paper is concerned with a maximum principle for a new class of non-zero sum stochastic differential games. Compared with the existing literature, the game systems in this paper are forward-backward systems in which the control variables consist of two components: the continuous controls and the impulse controls. Necessary optimality conditions and sufficient optimality conditions in the form of maximum principle are obtained respectively for open-loop Nash equilibrium point of the foregoing games. A fund management problem is used to shed light on the application of the theoretical results, and the optimal investment portfolio and optimal impulse consumption strategy are obtained explicitly.
Citation: Dejian Chang, Zhen Wu. Stochastic maximum principle for non-zero sum differential games of FBSDEs with impulse controls and its application to finance. Journal of Industrial & Management Optimization, 2015, 11 (1) : 27-40. doi: 10.3934/jimo.2015.11.27
References:
[1]

T. T. K. An and B. Øksendal, Maximum principle for stochastic differential games with partial information,, Journal of Optimization Theory and Applications, 139 (2008), 463.  doi: 10.1007/s10957-008-9398-y.  Google Scholar

[2]

T. Basar and G. J. Olsder, Dynamic Noncooperative Game Theory,, Mathematics in Science and Engineering, (1982).   Google Scholar

[3]

A. Bensoussan, Lectures on Stochastic Control, in Nonlinear Filtering and Stochastic Control,, ser. Lecture Notes in Mathematics, (1982).   Google Scholar

[4]

A. Cadenillas and I. Karatzas, The stochastic maximum principle for linear convex optimal control with random coefficients,, SIAM J. Control Optim., 33 (1995), 590.  doi: 10.1137/S0363012992240722.  Google Scholar

[5]

A. Cadenillas and F. Zapatero, Classical and impulse stochastic control of the exchange rate using interest rates and reserves,, Math. Finance, 10 (2000), 141.  doi: 10.1111/1467-9965.00086.  Google Scholar

[6]

M. H. A. Davis and A. Norman, Portfolio selection with transaction costs,, Math. Oper. Res., 15 (1990), 676.  doi: 10.1287/moor.15.4.676.  Google Scholar

[7]

D. Duffie and L. Epstein, Stochastic differential utility,, Econometrica, 60 (1992), 353.  doi: 10.2307/2951600.  Google Scholar

[8]

N. El Karoui, S. Peng and M. C. Quenez, Backward stochastic differential equations in finance,, Math. Finance, 7 (1997), 1.  doi: 10.1111/1467-9965.00022.  Google Scholar

[9]

S. Hamadéne, Nonzero-sum linear-quadratic stochastic differential games and backward-forward equations,, Stochastic Anal. Appl., 17 (1999), 117.  doi: 10.1080/07362999908809591.  Google Scholar

[10]

E. C. M., Hui and H. Xiao, Maximum principle for differential games of forward-backward stochastic systems with applications,, J. Math. Anal. Appl., 386 (2012), 412.  doi: 10.1016/j.jmaa.2011.08.009.  Google Scholar

[11]

R. Isaacs, Differential Games,, Parts 1-4. The RAND Corporation, (): 1.   Google Scholar

[12]

M. Jeanblanc-Pique, Impulse control method and exchange rate,, Math. Finance, 3 (1993), 161.  doi: 10.1111/j.1467-9965.1993.tb00085.x.  Google Scholar

[13]

R. Korn, Some appliations of impulse control in mathematical finance,, Math. Meth. Oper. Res., 50 (1999), 493.  doi: 10.1007/s001860050083.  Google Scholar

[14]

A. E. B. Lim and X. Zhou, Risk-sensitive control with HARA utility,, IEEE Trans. Autom. Control, 46 (2001), 563.  doi: 10.1109/9.917658.  Google Scholar

[15]

B. M. Miller and E. Y. Rubinovich, Impulsive Control in Continuous and Discrete-Continuous Systems,, Kluwer Academic/Plenum Publishers, (2003).  doi: 10.1007/978-1-4615-0095-7.  Google Scholar

[16]

B. Øksendal and A. Sulem, Optimal consumption and portfolio with both fixed and proportional transaction costs,, SIAM J. Control Optim., 40 (2002), 1765.  doi: 10.1137/S0363012900376013.  Google Scholar

[17]

L. Pan and J. Yong, A differential game with multi-level of hierarchy,, J. Math. Anal. Appl., 161 (1991), 522.  doi: 10.1016/0022-247X(91)90348-4.  Google Scholar

[18]

E. Pardoux and S. Peng, Adapted solution of a backward stochastic differential equation,, Syst. Control Lett., 14 (1990), 55.  doi: 10.1016/0167-6911(90)90082-6.  Google Scholar

[19]

S. Peng, A general stochastic maximum principle for optimal control problems,, SIAM J. Control Optim., 28 (1990), 966.  doi: 10.1137/0328054.  Google Scholar

[20]

S. Peng, Backward stochastic differential equations and applications to optimal control,, Appl. Math. Optim., 27 (1993), 125.  doi: 10.1007/BF01195978.  Google Scholar

[21]

G. Wang and Z. Wu, The maximum principles for stochastic recursive optimal control problems under partial information,, IEEE Trans. Autom. Control, 54 (2009), 1230.  doi: 10.1109/TAC.2009.2019794.  Google Scholar

[22]

G. Wang and Z. Yu, A Pontryagin's maximum principle for nonzero-sum differential games of BSDEs with applications,, IEEE Trans. Autom. Control, 55 (2010), 1742.  doi: 10.1109/TAC.2010.2048052.  Google Scholar

[23]

G. Wang and Z. Yu, A partial information nonzero-sum differential game of backward stochastic diffrential equations with applications,, Automatica, 48 (2012), 342.  doi: 10.1016/j.automatica.2011.11.010.  Google Scholar

[24]

Z. Wu, Maximum principle for optimal control problem of fully coupled forward-backward stochastic systems,, Syst. Sci. Math. Sci., 11 (1998), 249.   Google Scholar

[25]

W. Xu, Stochastic maximum principle for optimal control problem of forward and backward system,, Journal of the Australian Math. Society B, 37 (1995), 172.  doi: 10.1017/S0334270000007645.  Google Scholar

[26]

D. W. K. Yeung and L. A. Petrosyan, Cooperative Stochastic Differential Games,, Springer Series in Operations Research and Financial Engineering. Springer, (2006).   Google Scholar

[27]

J. Yong, A leader-follower stochastic linear quadratic differential game,, SIAM J. Control Optim., 41 (2002), 1015.  doi: 10.1137/S0363012901391925.  Google Scholar

show all references

References:
[1]

T. T. K. An and B. Øksendal, Maximum principle for stochastic differential games with partial information,, Journal of Optimization Theory and Applications, 139 (2008), 463.  doi: 10.1007/s10957-008-9398-y.  Google Scholar

[2]

T. Basar and G. J. Olsder, Dynamic Noncooperative Game Theory,, Mathematics in Science and Engineering, (1982).   Google Scholar

[3]

A. Bensoussan, Lectures on Stochastic Control, in Nonlinear Filtering and Stochastic Control,, ser. Lecture Notes in Mathematics, (1982).   Google Scholar

[4]

A. Cadenillas and I. Karatzas, The stochastic maximum principle for linear convex optimal control with random coefficients,, SIAM J. Control Optim., 33 (1995), 590.  doi: 10.1137/S0363012992240722.  Google Scholar

[5]

A. Cadenillas and F. Zapatero, Classical and impulse stochastic control of the exchange rate using interest rates and reserves,, Math. Finance, 10 (2000), 141.  doi: 10.1111/1467-9965.00086.  Google Scholar

[6]

M. H. A. Davis and A. Norman, Portfolio selection with transaction costs,, Math. Oper. Res., 15 (1990), 676.  doi: 10.1287/moor.15.4.676.  Google Scholar

[7]

D. Duffie and L. Epstein, Stochastic differential utility,, Econometrica, 60 (1992), 353.  doi: 10.2307/2951600.  Google Scholar

[8]

N. El Karoui, S. Peng and M. C. Quenez, Backward stochastic differential equations in finance,, Math. Finance, 7 (1997), 1.  doi: 10.1111/1467-9965.00022.  Google Scholar

[9]

S. Hamadéne, Nonzero-sum linear-quadratic stochastic differential games and backward-forward equations,, Stochastic Anal. Appl., 17 (1999), 117.  doi: 10.1080/07362999908809591.  Google Scholar

[10]

E. C. M., Hui and H. Xiao, Maximum principle for differential games of forward-backward stochastic systems with applications,, J. Math. Anal. Appl., 386 (2012), 412.  doi: 10.1016/j.jmaa.2011.08.009.  Google Scholar

[11]

R. Isaacs, Differential Games,, Parts 1-4. The RAND Corporation, (): 1.   Google Scholar

[12]

M. Jeanblanc-Pique, Impulse control method and exchange rate,, Math. Finance, 3 (1993), 161.  doi: 10.1111/j.1467-9965.1993.tb00085.x.  Google Scholar

[13]

R. Korn, Some appliations of impulse control in mathematical finance,, Math. Meth. Oper. Res., 50 (1999), 493.  doi: 10.1007/s001860050083.  Google Scholar

[14]

A. E. B. Lim and X. Zhou, Risk-sensitive control with HARA utility,, IEEE Trans. Autom. Control, 46 (2001), 563.  doi: 10.1109/9.917658.  Google Scholar

[15]

B. M. Miller and E. Y. Rubinovich, Impulsive Control in Continuous and Discrete-Continuous Systems,, Kluwer Academic/Plenum Publishers, (2003).  doi: 10.1007/978-1-4615-0095-7.  Google Scholar

[16]

B. Øksendal and A. Sulem, Optimal consumption and portfolio with both fixed and proportional transaction costs,, SIAM J. Control Optim., 40 (2002), 1765.  doi: 10.1137/S0363012900376013.  Google Scholar

[17]

L. Pan and J. Yong, A differential game with multi-level of hierarchy,, J. Math. Anal. Appl., 161 (1991), 522.  doi: 10.1016/0022-247X(91)90348-4.  Google Scholar

[18]

E. Pardoux and S. Peng, Adapted solution of a backward stochastic differential equation,, Syst. Control Lett., 14 (1990), 55.  doi: 10.1016/0167-6911(90)90082-6.  Google Scholar

[19]

S. Peng, A general stochastic maximum principle for optimal control problems,, SIAM J. Control Optim., 28 (1990), 966.  doi: 10.1137/0328054.  Google Scholar

[20]

S. Peng, Backward stochastic differential equations and applications to optimal control,, Appl. Math. Optim., 27 (1993), 125.  doi: 10.1007/BF01195978.  Google Scholar

[21]

G. Wang and Z. Wu, The maximum principles for stochastic recursive optimal control problems under partial information,, IEEE Trans. Autom. Control, 54 (2009), 1230.  doi: 10.1109/TAC.2009.2019794.  Google Scholar

[22]

G. Wang and Z. Yu, A Pontryagin's maximum principle for nonzero-sum differential games of BSDEs with applications,, IEEE Trans. Autom. Control, 55 (2010), 1742.  doi: 10.1109/TAC.2010.2048052.  Google Scholar

[23]

G. Wang and Z. Yu, A partial information nonzero-sum differential game of backward stochastic diffrential equations with applications,, Automatica, 48 (2012), 342.  doi: 10.1016/j.automatica.2011.11.010.  Google Scholar

[24]

Z. Wu, Maximum principle for optimal control problem of fully coupled forward-backward stochastic systems,, Syst. Sci. Math. Sci., 11 (1998), 249.   Google Scholar

[25]

W. Xu, Stochastic maximum principle for optimal control problem of forward and backward system,, Journal of the Australian Math. Society B, 37 (1995), 172.  doi: 10.1017/S0334270000007645.  Google Scholar

[26]

D. W. K. Yeung and L. A. Petrosyan, Cooperative Stochastic Differential Games,, Springer Series in Operations Research and Financial Engineering. Springer, (2006).   Google Scholar

[27]

J. Yong, A leader-follower stochastic linear quadratic differential game,, SIAM J. Control Optim., 41 (2002), 1015.  doi: 10.1137/S0363012901391925.  Google Scholar

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