On the Approximation of Optimal Control in Regime-Switching Diffusions
We study approximation and structural simplification of optimal control policies for controlled regime-switching diffusion processes for discounted, ergodic, finite-horizon, and exit-time criteria. We first establish continuity of the cost functionals over classes of Markov and stationary Markov policies by exploiting elliptic and parabolic regularity of the corresponding Hamilton--Jacobi--Bellman and Poisson equations. Using density results of policies with finite-action, piecewise-constant, and Lipschitz continuous, we show that each control problem admits $\varepsilon$-optimal policies within these structured subclasses. We then construct an Euler--Maruyama approximation of the controlled regime-switching diffusion under piecewise-constant controls. We prove strong convergence of the controlled state process and establish convergence of the associated finite-horizon value functions with rate $O(h^{γ/2})$. Building on this discretization, we develop a finite-state approximation of the induced discrete-time Markov chain via state-space quantization. We show that the value functions of the finite models converge uniformly on compact sets to the value function of the original problem, and that optimal policies of the approximating models are asymptotically optimal. These results provide a systematic framework for approximating regime-switching diffusion control problems and justify the use of structured policies and finite-state models for numerical implementation.