Sufficient stochastic maximum principle in a regime-switching diffusion model

TL;DR

This paper establishes a sufficient stochastic maximum principle for controlling regime-switching diffusion models, linking it to dynamic programming and demonstrating its application in quadratic loss minimization for portfolio optimization.

Contribution

It introduces a new sufficient maximum principle for regime-switching diffusions and connects it with dynamic programming, with practical application to portfolio selection.

Findings

Proves a sufficient stochastic maximum principle for regime-switching diffusions.

Connects the maximum principle with dynamic programming methods.

Applies the theory to quadratic loss minimization in portfolio management.

Abstract

We prove a sufficient stochastic maximum principle for the optimal control of a regime-switching diffusion model. We show the connection to dynamic programming and we apply the result to a quadratic loss minimization problem, which can be used to solve a mean-variance portfolio selection problem.