Conditional LQ time-inconsistent Markov-switching stochastic optimal control problem for diffusion with jumps
Volume 9, Issue 2 (2022), pp. 157–205
Pub. online: 3 February 2022
Type: Research Article
Open Access
Open Access
Received
12 October 2021
12 October 2021
Revised
9 January 2022
9 January 2022
Accepted
12 January 2022
12 January 2022
Published
3 February 2022
3 February 2022
Abstract
The paper presents a characterization of equilibrium in a game-theoretic description of discounting conditional stochastic linear-quadratic (LQ for short) optimal control problem, in which the controlled state process evolves according to a multidimensional linear stochastic differential equation, when the noise is driven by a Poisson process and an independent Brownian motion under the effect of a Markovian regime-switching. The running and the terminal costs in the objective functional are explicitly dependent on several quadratic terms of the conditional expectation of the state process as well as on a nonexponential discount function, which create the time-inconsistency of the considered model. Open-loop Nash equilibrium controls are described through some necessary and sufficient equilibrium conditions. A state feedback equilibrium strategy is achieved via certain differential-difference system of ODEs. As an application, we study an investment–consumption and equilibrium reinsurance/new business strategies for mean-variance utility for insurers when the risk aversion is a function of current wealth level. The financial market consists of one riskless asset and one risky asset whose price process is modeled by geometric Lévy processes and the surplus of the insurers is assumed to follow a jump-diffusion model, where the values of parameters change according to continuous-time Markov chain. A numerical example is provided to demonstrate the efficacy of theoretical results.
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