Stochastic linear-quadratic control problem for regime-switching jump-diffusion system and its application to finance
Abstract
This paper investigates a stochastic linear-quadratic (SLQ) control problem for a regime-switching jump-diffusion system. Unlike traditional regime-switching diffusion systems that couple a diffusion process with a Markov chain, we incorporate the jumps of the Markov chain into the state equation. This modeling methodology effectively captures potential gains or losses of the system during the regime transitions. It should be noted that the introduction of Markov chain jumps into the state equation leads to increased complexity in the corresponding coupled differential Riccati equations (CDREs), thereby rendering the solvability of the control problem more challenging. Under the assumption that the cost functional is uniformly convex, we establish the unique solvability of the corresponding CDREs. Building upon this foundation, we derive a closed-loop representation for the unique open-loop optimal control. Finally, we apply our theoretical results to the mean-variance portfolio selection problem in a regime-switching financial market with Markov chain jumps and obtain its efficient frontier.
Related
- Recursive Stochastic Linear-Quadratic Control with Indefinite Weights for Jump-Diffusion Systems with Random Coefficients
- A global stochastic maximum principle for forward-backward stochastic control systems with quadratic convex generator and unbounded terminal condition
- Ergodic Linear-Quadratic Optimal Control with Stochastic Coefficients
- Stochastic Riccati equations with jumps for indefinite linear-quadratic control: A stochastic value-flow approach
- Reinforcement learning for constrained stochastic linear--quadratic control in continuous time
BibTeX
@misc{wu2026stochastic,
title = {{Stochastic linear-quadratic control problem for regime-switching jump-diffusion system and its application to finance}},
author = {Fan Wu and Xun Li and Jie Xiong and Xin Zhang},
howpublished = {arXiv},
year = {2026},
month = sep,
doi = {10.48550/arxiv.2609.27589},
eprint = {2609.27589},
archivePrefix = {arXiv},
url = {https://arxiv.org/abs/2609.27589},
}
RIS
TY - UNPB
TI - Stochastic linear-quadratic control problem for regime-switching jump-diffusion system and its application to finance
AU - Fan Wu
AU - Xun Li
AU - Jie Xiong
AU - Xin Zhang
PY - 2026
DA - 2026/09/23
PB - arXiv
DO - 10.48550/arxiv.2609.27589
UR - https://arxiv.org/abs/2609.27589
AB - This paper investigates a stochastic linear-quadratic (SLQ) control problem for a regime-switching jump-diffusion system. Unlike traditional regime-switching diffusion systems that couple a diffusion process with a Markov chain, we incorporate the jumps of the Markov chain into the state equation. This modeling methodology effectively captures potential gains or losses of the system during the regime transitions. It should be noted that the introduction of Markov chain jumps into the state equation leads to increased complexity in the corresponding coupled differential Riccati equations (CDREs), thereby rendering the solvability of the control problem more challenging. Under the assumption that the cost functional is uniformly convex, we establish the unique solvability of the corresponding CDREs. Building upon this foundation, we derive a closed-loop representation for the unique open-loop optimal control. Finally, we apply our theoretical results to the mean-variance portfolio selection problem in a regime-switching financial market with Markov chain jumps and obtain its efficient frontier.
ER -