Indefinite Stochastic Linear Quadratic Control and Generalized Differential Riccati Equation

Abstract

A stochastic linear quadratic (LQ) control problem is indefinite when the cost weighting matrices for the state and the control are allowed to be indefinite. Indefinite stochastic LQ theory has been extensively developed and has found interesting applications in finance. However, there remains an outstanding open problem, which is to identify an appropriate Riccati-type equation whose solvability is {\it equivalent} to the solvability of the indefinite stochastic LQ problem. This paper solves this open problem for LQ control in a finite time horizon. A new type of differential Riccati equation, called the generalized (differential) Riccati equation, is introduced, which involves algebraic equality/inequality constraints and a matrix pseudoinverse. It is then shown that the solvability of the generalized Riccati equation is not only sufficient, but also necessary, for the well-posedness of the indefinite LQ problem and the existence of optimal feedback/open-loop controls. Moreover, all of the optimal controls can be identified via the solution to the Riccati equation. An example is presented to illustrate the theory developed.