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arXiv · 2609.27589

Stochastic linear-quadratic control problem for regime-switching jump-diffusion system and its application to finance

Fan Wu·Xun Li·Jie Xiong·Xin Zhang
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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.

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Fan Wu, Xun Li, Jie Xiong, Xin Zhang. 2026-09-23. Stochastic linear-quadratic control problem for regime-switching jump-diffusion system and its application to finance. https://arxiv.org/abs/2609.27589

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