Backward Stochastic Differential Equation

Mean field equilibrium asset pricing model under partial observation: An exponential quadratic Gaussian approach ArXiv ID: 2410.01352 “View on arXiv” Authors: Unknown Abstract This paper studies an asset pricing model in a partially observable market with a large number of heterogeneous agents using the mean field game theory. In this model, we assume that investors can only observe stock prices and must infer the risk premium from these observations when determining trading strategies. We characterize the equilibrium risk premium in such a market through a solution to the mean field backward stochastic differential equation (BSDE). Specifically, the solution to the mean field BSDE can be expressed semi-analytically by employing an exponential quadratic Gaussian framework. We then construct the risk premium process, which cannot be observed directly by investors, endogenously using the Kalman-Bucy filtering theory. In addition, we include a simple numerical simulation to visualize the dynamics of our market model. ...

Multidimensional indefinite stochastic Riccati equations and zero-sum stochastic linear-quadratic differential games with non-Markovian regime switching ArXiv ID: 2309.05003 “View on arXiv” Authors: Unknown Abstract This paper is concerned with zero-sum stochastic linear-quadratic differential games in a regime switching model. The coefficients of the games depend on the underlying noises, so it is a non-Markovian regime switching model. Based on the solutions of a new kind of multidimensional indefinite stochastic Riccati equation (SRE) and a multidimensional linear backward stochastic differential equation (BSDE) with unbounded coefficients, we provide closed-loop optimal feedback control-strategy pairs for the two players. The main contribution of this paper, which is of great importance in its own right from the BSDE theory point of view, is to prove the existence and uniqueness of the solution to the new kind of SRE. Notably, the first component of the solution (as a process) is capable of taking positive and negative values simultaneously. For homogeneous systems, we obtain the optimal feedback control-strategy pairs under general closed convex cone control constraints. Finally, these results are applied to portfolio selection games with full or partial no-shorting constraint in a regime switching market with random coefficients. ...