June  2013, 3(2): 233-244. doi: 10.3934/mcrf.2013.3.233

Constrained BSDEs, viscosity solutions of variational inequalities and their applications

1. 

School of Mathematics and System Science, Shandong University, 250100, Jinan, China

2. 

Key Laboratory of Random Complex Structures and Data Science, Institute of Applied Mathematics, Academy of Mathematics and Systems Science, Chinese Academy of Sciences, Beijing, 100080, China

Received  January 2011 Revised  March 2012 Published  March 2013

In this paper, we study the relation between the smallest $g$-supersolution of constrained backward stochastic differential equation and viscosity solution of constraint semilinear parabolic PDE, i.e. variation inequalities. And we get an existence result of variation inequalities via constrained BSDE, and prove a uniqueness result with a condition on the constraint. Then we use these results to give a probabilistic interpretation result for reflected BSDE with a discontinuous barrier and other kind of reflected BSDE.
Citation: Shige Peng, Mingyu Xu. Constrained BSDEs, viscosity solutions of variational inequalities and their applications. Mathematical Control & Related Fields, 2013, 3 (2) : 233-244. doi: 10.3934/mcrf.2013.3.233
References:
[1]

R. Buckdahn and Y. Hu, Hedging contingent claims for a large investor in an incomplete market,, Adv. Appl. Prob., 30 (1998), 239.  doi: 10.1239/aap/1035228002.  Google Scholar

[2]

M. Crandall, H. Ishii and P.-L. Lions, User's guide to viscosity solutions of second order partial differential equations,, Bulletin of the American Mathematical Society, 27 (1992), 1.  doi: 10.1090/S0273-0979-1992-00266-5.  Google Scholar

[3]

J. Cvitanić, I. Karatzas and H. Mete Soner, Backward stochastic differential equations with constraints on the gain-process,, The Annals of Probability, 26 (1998), 1522.  doi: 10.1214/aop/1022855872.  Google Scholar

[4]

Y. Chen, M. Dai and M. Xu, Superhedging with ratio constraint,, preprint, (2011).   Google Scholar

[5]

N. El Karoui, C. Kapoudjian, E. Pardoux, S. Peng and M. C. Quenez, Reflected solutions of backward SDE's, and related obstacle problems for PDE's,, Annals of Probability, 25 (1997), 702.  doi: 10.1214/aop/1024404416.  Google Scholar

[6]

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

[7]

N. El Karoui and M. C. Quenez, Dynamic programming and pricing of contingent claims in an incomplete market,, SIAM J. Control Optim., 33 (1995), 29.  doi: 10.1137/S0363012992232579.  Google Scholar

[8]

S. Hamadène, Reflected BSDE's with discontinuous barrier and application,, Stochastics and Stochastics Reports, 74 (2002), 571.  doi: 10.1080/1045112021000036545.  Google Scholar

[9]

I. Karatzas and S. G. Kou, Hedging American contingent clains with constrained portfolios,, Finance and Stochastics, 2 (1998), 215.  doi: 10.1007/s007800050039.  Google Scholar

[10]

I. Kharroub, J. Ma, H. Pham and J. Zhang, Backward SDEs with constrained jumps and quasi-variational inequalities,, Annals of Probability, 38 (2010), 794.  doi: 10.1214/09-AOP496.  Google Scholar

[11]

J.-P. Lepeltier and M. Xu, Penalization method for reflected backward stochastic differential equations with one r.c.l.l. barrier,, Statistics and Probability Letters, 75 (2005), 58.  doi: 10.1016/j.spl.2005.05.016.  Google Scholar

[12]

S. Peng, Probabilistic interpretation for system of quasilinear parabolic partial differential equations,, Stochastics and Stochastics Reports, 37 (1991), 61.   Google Scholar

[13]

S. Peng, Monotonic limit theory of BSDE and nonlinear decomposition theorem of Doob-Meyer's type,, Probab. Theory and Related Fields, 113 (1999), 473.  doi: 10.1007/s004400050214.  Google Scholar

[14]

S. Peng and M. Xu, Smallest $g$-Supermartingales and reflected BSDE with single and double $L^2$ obstacles,, Annuals of Institute of Henri Poincaré Probab. Statist., 41 (2005), 605.  doi: 10.1016/j.anihpb.2004.12.002.  Google Scholar

[15]

S. Peng and M. Xu, $g_{\Gamma}$-expectations and the related nonlinear Doob-Meyer decomposition theorem,, in, (2007), 122.  doi: 10.1142/9789812790552_0010.  Google Scholar

[16]

S. Peng and M. Xu, Reflected BSDE with a Constrainte and its Applications in an Incomplete Market,, Bernoulli, 16 (2010), 614.  doi: 10.3150/09-BEJ227.  Google Scholar

[17]

N. Touzi, "Stochastic Control Problems, Viscosity Solutions and Application to Finance,", Scuola Normale Superiore di Pisa Quaderni, (2004).   Google Scholar

show all references

References:
[1]

R. Buckdahn and Y. Hu, Hedging contingent claims for a large investor in an incomplete market,, Adv. Appl. Prob., 30 (1998), 239.  doi: 10.1239/aap/1035228002.  Google Scholar

[2]

M. Crandall, H. Ishii and P.-L. Lions, User's guide to viscosity solutions of second order partial differential equations,, Bulletin of the American Mathematical Society, 27 (1992), 1.  doi: 10.1090/S0273-0979-1992-00266-5.  Google Scholar

[3]

J. Cvitanić, I. Karatzas and H. Mete Soner, Backward stochastic differential equations with constraints on the gain-process,, The Annals of Probability, 26 (1998), 1522.  doi: 10.1214/aop/1022855872.  Google Scholar

[4]

Y. Chen, M. Dai and M. Xu, Superhedging with ratio constraint,, preprint, (2011).   Google Scholar

[5]

N. El Karoui, C. Kapoudjian, E. Pardoux, S. Peng and M. C. Quenez, Reflected solutions of backward SDE's, and related obstacle problems for PDE's,, Annals of Probability, 25 (1997), 702.  doi: 10.1214/aop/1024404416.  Google Scholar

[6]

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

[7]

N. El Karoui and M. C. Quenez, Dynamic programming and pricing of contingent claims in an incomplete market,, SIAM J. Control Optim., 33 (1995), 29.  doi: 10.1137/S0363012992232579.  Google Scholar

[8]

S. Hamadène, Reflected BSDE's with discontinuous barrier and application,, Stochastics and Stochastics Reports, 74 (2002), 571.  doi: 10.1080/1045112021000036545.  Google Scholar

[9]

I. Karatzas and S. G. Kou, Hedging American contingent clains with constrained portfolios,, Finance and Stochastics, 2 (1998), 215.  doi: 10.1007/s007800050039.  Google Scholar

[10]

I. Kharroub, J. Ma, H. Pham and J. Zhang, Backward SDEs with constrained jumps and quasi-variational inequalities,, Annals of Probability, 38 (2010), 794.  doi: 10.1214/09-AOP496.  Google Scholar

[11]

J.-P. Lepeltier and M. Xu, Penalization method for reflected backward stochastic differential equations with one r.c.l.l. barrier,, Statistics and Probability Letters, 75 (2005), 58.  doi: 10.1016/j.spl.2005.05.016.  Google Scholar

[12]

S. Peng, Probabilistic interpretation for system of quasilinear parabolic partial differential equations,, Stochastics and Stochastics Reports, 37 (1991), 61.   Google Scholar

[13]

S. Peng, Monotonic limit theory of BSDE and nonlinear decomposition theorem of Doob-Meyer's type,, Probab. Theory and Related Fields, 113 (1999), 473.  doi: 10.1007/s004400050214.  Google Scholar

[14]

S. Peng and M. Xu, Smallest $g$-Supermartingales and reflected BSDE with single and double $L^2$ obstacles,, Annuals of Institute of Henri Poincaré Probab. Statist., 41 (2005), 605.  doi: 10.1016/j.anihpb.2004.12.002.  Google Scholar

[15]

S. Peng and M. Xu, $g_{\Gamma}$-expectations and the related nonlinear Doob-Meyer decomposition theorem,, in, (2007), 122.  doi: 10.1142/9789812790552_0010.  Google Scholar

[16]

S. Peng and M. Xu, Reflected BSDE with a Constrainte and its Applications in an Incomplete Market,, Bernoulli, 16 (2010), 614.  doi: 10.3150/09-BEJ227.  Google Scholar

[17]

N. Touzi, "Stochastic Control Problems, Viscosity Solutions and Application to Finance,", Scuola Normale Superiore di Pisa Quaderni, (2004).   Google Scholar

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