A stochastic control problem and related free boundaries in finance
Chonghu Guan Xun Li Zuo Quan Xu Fahuai Yi

In this paper, we investigate an optimal stopping problem (mixed with stochastic controls) for a manager whose utility is nonsmooth and nonconcave over a finite time horizon. The paper aims to develop a new methodology, which is significantly different from those of mixed dynamic optimal control and stopping problems in the existing literature, so as to figure out the manager's best strategies. The problem is first reformulated into a free boundary problem with a fully nonlinear operator. Then, by means of a dual transformation, it is further converted into a free boundary problem with a linear operator, which can be consequently tackled by the classical method. Finally, using the inverse transformation, we obtain the properties of the optimal trading strategy and the optimal stopping time for the original problem.

keywords: Parabolic variational inequality free boundary nonsmooth utility optimal stopping dual transformation
Global existence and uniqueness for a hyperbolic system with free boundary
Tong Yang Fahuai Yi
In this paper, we consider a $2\times 2$ hyperbolic system originates from the theory of phase dynamics. This one-phase problem can be obtained by using the Catteneo-Fourier law which is a variant of the standard Fourier law in one dimensional space. A new classical existence and uniqueness result is established by some a priori estimates using the characteristic method. The convergence of the solutions to the one of classical Stefan problems is also obtained.
keywords: Stefan problem classical solution. Hyperbolic system
An optimal consumption-investment model with constraint on consumption
Zuo Quan Xu Fahuai Yi
A continuous-time consumption-investment model with constraint is considered for a small investor whose decisions are the consumption rate and the allocation of wealth to a risk-free and a risky asset with logarithmic Brownian motion fluctuations. The consumption rate is subject to an upper bound constraint which linearly depends on the investor's wealth and bankruptcy is prohibited. The investor's objective is to maximize the total expected discounted utility of consumption over an infinite trading horizon. It is shown that the value function is (second order) smooth everywhere but a unique (known) possibly exception point and the optimal consumption-investment strategy is provided in a closed feedback form of wealth. According to this model, an investor should take the similar investment strategy as in Merton's model regardless his financial situation. By contrast, the optimal consumption strategy does depend on the investor's financial situation: he should use a similar consumption strategy as in Merton's model when he is in a bad situation, and consume as much as possible when he is in a good situation.
keywords: constrained consumption. constrained viscosity solution stochastic control in finance free boundary problem Optimal consumption-investment model
Free boundary problem of Barenblatt equation in stochastic control
Xiaoshan Chen Fahuai Yi
The following type of parabolic Barenblatt equations
                                           min {$\partial_t V - \mathcal{L}_1 V, \partial_t V-\mathcal{L}_2 V$} = 0
is studied, where $\mathcal{L}_1$ and $\mathcal{L}_2$ are different elliptic operators of second order. The (unknown) free boundary of the problem is a divisional curve, which is the optimal insured boundary in our stochastic control problem. It will be proved that the free boundary is a differentiable curve.
    To the best of our knowledge, this is the first result on free boundary for Barenblatt Equation. We will establish the model and verification theorem by the use of stochastic analysis. The existence of classical solution to the HJB equation and the differentiability of free boundary are obtained by PDE techniques.
keywords: optimal control Free boundary problem stochastic control HJB equation. Barenblatt equation

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