Stochastic Maximum Principle for Forward-Backward Regime Switching Jump Diffusion Systems and Applications to Finance
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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.
KeywordsStochastic maximum principle Dynamic programming principle Forward-backward stochastic differential equation Regime switching Jump diffusion
2000 MR Subject Classification93E20 60H10 91B26
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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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