Generalized Risk-Sensitive Optimal Control and Hamilton–Jacobi–Bellman Equation

Abstract

In this article, we consider the generalized risk-sensitive optimal control problem, where the objective functional is defined by the controlled backward stochastic differential equation (BSDE) with quadratic growth coefficient. We extend the earlier results of the risk-sensitive optimal control problem to the case of the objective functional given by the controlled BSDE. Note that the risk-neutral stochastic optimal control problem corresponds to the BSDE objective functional with linear growth coefficient, which can be viewed as a special case of the article. We obtain the generalized risk-sensitive dynamic programming principle for the value function via the backward semigroup associated with the BSDE. Then we show that the corresponding value function is a viscosity solution to the Hamilton-Jacobi-Bellman equation. Under an additional parameter condition, the viscosity solution is unique, which implies that the solution characterizes the value function. We apply the theoretical results to the risk-sensitive European option pricing problem.