Stochastic Maximum Principle for Forward-Backward Regime Switching Jump Diffusion Systems and Applications to Finance

Abstract

The authors prove a sufficient stochastic maximum principle for the optimal control of a forward-backward Markov regime switching jump diffusion system and show its connection to dynamic programming principle. The result is applied to a cash flow valuation problem with terminal wealth constraint in a financial market. An explicit optimal strategy is obtained in this example.

Keywords

Stochastic maximum principle / Dynamic programming principle / Forward-backward stochastic differential equation / Regime switching / Jump diffusion

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