Download this Paper Open PDF in Browser

A General Theory of Markovian Time Inconsistent Stochastic Control Problems

55 Pages Posted: 20 Oct 2010  

Tomas Bjork

Stockholm School of Economics - Swedish House of Finance

Agatha Murgoci

University of Aarhus - School of Business and Social Sciences

Date Written: September 17, 2010

Abstract

We develop a theory for stochastic control problems which, in various ways, are time inconsistent in the sense that they do not admit a Bellman optimality principle. We attach these problems by viewing them within a game theoretic framework, and we look for Nash subgame perfect equilibrium points. For a general controlled Markov process and a fairly general objective functional we derive an extension of the standard Hamilton-Jacobi-Bellman equation, in the form of a system of on-linear equations, for the determination for the equilibrium strategy as well as the equilibrium value function. All known examples of time inconsistency in the literature are easily seen to be special cases of the present theory. We also prove that for every time inconsistent problem, there exists an associated time consistent problem such that the optimal control and the optimal value function for the consistent problem coincides with the equilibrium control and value function respectively for the time inconsistent problem. We also study some concrete examples.

Keywords: Time consistency, time inconsistent control, dynamic programming, time inconsistency, stochastic control, hyperbolic discounting, meanvariance, Bellman equation, Hamilton-Jacobi-Bellman

Suggested Citation

Bjork, Tomas and Murgoci, Agatha, A General Theory of Markovian Time Inconsistent Stochastic Control Problems (September 17, 2010). Available at SSRN: https://ssrn.com/abstract=1694759 or http://dx.doi.org/10.2139/ssrn.1694759

Tomas Bjork

Stockholm School of Economics - Swedish House of Finance ( email )

Drottninggatan 98
111 60 Stockholm
Sweden

Agatha Murgoci (Contact Author)

University of Aarhus - School of Business and Social Sciences ( email )

Nordre Ringgade 1
Aarhus C, DK-8000
Denmark

Paper statistics

Downloads
796
Rank
25,319
Abstract Views
2,466