Partially Observed Time-Inconsistency Recursive Optimization Problem and Application

Partially Observed Time-Inconsistency Recursive Optimization Problem and Application

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Article ID: iaor2014740
Volume: 161
Issue: 2
Start Page Number: 664
End Page Number: 687
Publication Date: May 2014
Journal: Journal of Optimization Theory and Applications
Authors: ,
Keywords: insurance, recursive algorithm, stochastic differential equations, Bellman
Abstract:

In this paper, we study a partially observed recursive optimization problem, which is time inconsistent in the sense that it does not admit the Bellman optimality principle. To obtain the desired results, we establish the Kalman–Bucy filtering equations for a family of parameterized forward and backward stochastic differential equations, which is a Hamiltonian system derived from the general maximum principle for the fully observed time‐inconsistency recursive optimization problem. By means of the backward separation technique, the equilibrium control for the partially observed time‐inconsistency recursive optimization problem is obtained, which is a feedback of the state filtering estimation. To illustrate the applications of theoretical results, an insurance premium policy problem under partial information is presented, and the observable equilibrium policy is derived explicitly.

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