Verification Theorem Of Stochastic Optimal Control With Mixed Delay And Applications To Finance

Abstract

AbstractThis paper focuses on a general model of a controlled stochastic differential equation with mixed delay in the state variable. Based on the Itô formula, stochastic analysis, convex analysis, and inequality technique, we obtain a semi‐coupled forward‐backward stochastic differential equation with mixed delay and mixed initial‐terminal conditions and prove that such forward‐backward system admits a unique adapted solution. The verification theorem for an optimal control of a system with mixed delay is established. The obtained results generalize and improve some recent results, and they are more easily verified and applied in practice. As an application, we conclude with finding explicitly the optimal consumption rate from the wealth process of a person given by a stochastic differential equation with mixed delay which fit into our general model.