Non-homogeneous stochastic LQ control with regime switching and random coefficients

Abstract

This paper is concerned with a general non-homogeneous stochastic linear quadratic (LQ) control problem with regime switching and random coefficients. We obtain the explicit optimal state feedback control and optimal value for this problem in terms of two systems of backward stochastic differential equations (BSDEs): one is the famous stochastic Riccati equation and the other one is a new linear multi-dimensional BSDE with all coefficients being unbounded. The existence and uniqueness of the solutions to these two systems of BSDEs are proved by means of BMO martingales and contraction mapping method. At last, the theory is applied to study an asset-liability management problem under the mean-variance criteria.