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Stochastic Maximum Principle for Forward-Backward Regime Switching Jump Diffusion Systems and Applications to Finance

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Abstract

The authors prove a sufficient stochastic maximum principle for the optimal control of a forward-backward Markov regime switching jump diffusion system and show its connection to dynamic programming principle. The result is applied to a cash flow valuation problem with terminal wealth constraint in a financial market. An explicit optimal strategy is obtained in this example.

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Acknowledgement

The authors would like to thank the anonymous referee for valuable comments, which led to a much better version of this paper.

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Authors and Affiliations

  1. School of Mathematics, Southeast University, Nanjing, 211189, China

    Siyu Lv

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

    Zhen Wu

Authors
  1. Siyu Lv
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  2. Zhen Wu
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Corresponding author

Correspondence to Zhen Wu.

Additional information

This work was supported by the National Natural Science Foundation of China (No. 61573217), the 111 Project (No.B12023), the National High-level Personnel of Special Support Program and the Chang Jiang Scholar Program of the Ministry of Education of China.

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Lv, S., Wu, Z. Stochastic Maximum Principle for Forward-Backward Regime Switching Jump Diffusion Systems and Applications to Finance. Chin. Ann. Math. Ser. B 39, 773–790 (2018). https://doi.org/10.1007/s11401-018-0095-3

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  • DOI: https://doi.org/10.1007/s11401-018-0095-3

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