Smoothness of a value function with discontinuous parameters

Click For Summary
SUMMARY

The discussion centers on the smoothness of the value function ##v:\mathbb{R}\to\mathbb{R}## defined as ##v(x) = \mathbb E \left[ \int_0^\infty e^{-\int_0^t r(X_\tau) d\tau} f(X_t) \bigg| X_0 = x, \ dX_t = \mu(X_t) dt + dB_t \right]##, where ##\mu, f, r## are bounded measurable functions that may be discontinuous. The author confirms that ##v## is continuous and seeks to determine if it is continuously differentiable. Additionally, the author inquires whether the differential equation ##r(x)v(x) = f(x) + \mu(x)v'(x) + \tfrac12 v''(x)## holds under the condition that ##\mu, f, r## are discontinuous.

PREREQUISITES
  • Understanding of stochastic calculus, particularly Itô's lemma.
  • Familiarity with Brownian motion and its properties.
  • Knowledge of measurable functions and their continuity properties.
  • Basic concepts of differential equations, especially in the context of value functions.
NEXT STEPS
  • Investigate the implications of discontinuous functions in stochastic differential equations.
  • Explore the conditions under which the value function remains continuously differentiable.
  • Study the application of Itô's lemma to derive properties of value functions in stochastic processes.
  • Examine existing literature on the smoothness of value functions in optimal control problems.
USEFUL FOR

Mathematicians, financial analysts, and researchers in stochastic processes or optimal control theory who are interested in the properties of value functions with discontinuous parameters.

economicsnerd
Messages
268
Reaction score
24
Let ##\mu: \mathbb{R}\to \mathbb{R}##, ##f: \mathbb{R}\to \mathbb{R}##, and ##r: \mathbb{R}\to [1, \infty)## be bounded measurable functions (which may be discontinuous).

I'm interested in the function ##v:\mathbb{R}\to\mathbb{R}## given by ##v(x) = \mathbb E \left[ \int_0^\infty e^{-\int_0^t r(X_\tau) d\tau} f(X_t) \bigg| X_0 = x, \ dX_t = \mu(X_t) dt + dB_t \right]##, where ##\{B_t\}_t## is a standard Brownian motion.

I know that ##v## is well-defined, and I'm confident that it's continuous. I'm wondering if I can get any stronger smoothness results than this. For instance, is ##v## continuously differentiable?
 
Physics news on Phys.org
Related question:

If everything above were ##C^2##, then ##v## would satisfy the DE, ##r(x)v(x) = f(x) + \mu(x)v'(x) + \tfrac12 v''(x)##. I'd love to know if, when ##\mu, f, r## are discontinuous, there's still any meaningful sense in which the DE is satisfied.
 
Last edited:

Similar threads

  • · Replies 2 ·
Replies
2
Views
2K
  • · Replies 3 ·
Replies
3
Views
1K
  • · Replies 11 ·
Replies
11
Views
3K
  • · Replies 1 ·
Replies
1
Views
2K
  • · Replies 3 ·
Replies
3
Views
3K
  • · Replies 4 ·
Replies
4
Views
2K
Replies
2
Views
2K
  • · Replies 1 ·
Replies
1
Views
2K
  • · Replies 2 ·
Replies
2
Views
2K
  • · Replies 2 ·
Replies
2
Views
2K