Weak Necessary and Sufficient Stochastic Maximum Principle for Markovian Regime-Switching Diffusion Models

Yusong Li, Harry Zheng

Published 2012-10-01, updated 2013-09-14Version 3

In this paper we prove a weak necessary and sufficient maximum principle for Markovian regime switching stochastic optimal control problems. Instead of insisting on the maximum condition of the Hamiltonian, we show that 0 belongs to the sum of Clarke's generalized gradient of the Hamiltonian and Clarke's normal cone of the control constraint set at the optimal control. Under a joint concavity condition on the Hamiltonian and a convexity condition on the terminal objective function, the necessary condition becomes sufficient. We give four examples to demonstrate the weak stochastic maximum principle.