Viscosity solutions to parabolic master equations and McKean–Vlasov SDEs with closed-loop controls

By Cong Wu, Jianfeng Zhang. The Annals of Applied Probability, 2018

53 citations recorded by the source corpus.

The master equation is a type of PDE whose state variable involves the distribution of certain underlying state process. It is a powerful tool for studying the limit behavior of large interacting systems, including mean field games and systemic risk. It also appears naturally in stochastic control problems with partial information and in time inconsistent problems. In this paper we propose a novel notion of viscosity solution for parabolic master equations, arising mainly from control problems, and establish its wellposedness. Our main innovation is to restrict the involved measures to certain set of semimartingale measures which satisfy the desired compactness. As an important example, we study the HJB master equation associated with the control problems for McKean-Vlasov SDEs. Due to practical considerations, we consider closed-loop controls. It turns out that the regularity of the value function becomes much more involved in this framework than the counterpart in the standard control problems. Finally, we build the whole theory in the path dependent setting, which is often seen in applications. The main result in this part is an extension of Dupire \cite{Dupire}'s functional Ito formula. This Ito formula requires a special structure of the derivatives with respect to the measures, which was originally due to Lions \cite{Lions4} in the state dependent case. We provided an elementary proof for this well known result in the short note \cite{WZ}, and the same arguments work in the path dependent setting here.

Subfields: Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/6c232ccb1824bf46d100b6c44b9da012ec8da771

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Citations in the corpus

Optimal control of path-dependent McKean–Vlasov SDEs in infinite-dimension (2020, methodology): “We do not address here the consistency property of ∂x∂μφ̂ (for hints on its proof we refer to [51], see the paragraph just after Theorem 2.”
Master Bellman equation in the Wasserstein space: Uniqueness of viscosity solutions (2021, methodology): “In [46], a new notion of viscosity-type solution is adopted, which differs from the Crandall-Lions definition since the maximum/minimum condition is formulated on compact subsets of the Wasserstein space.”
Wellposedness of Second Order Master Equations for Mean Field Games with Nonsmooth Data (2019, background): “So the viscosity solution approaches in Gangbo-Swiech [42], Gangbo-Tudorascu [44], Pham-Wei [60], and Wu-Zhang [66] for HJB equations on Wasserstein space (and slightly more general parabolic master equations in [66]), where the comparison principle is a main task, do not work here.”