Time-Reversal of Stochastic Maximum Principle

Abstract

Stochastic maximum principle (SMP) specifies a necessary condition for the solution of a stochastic optimal control problem. The condition involves a coupled system of forward and backward stochastic differential equations (FBSDE) for the state and the adjoint processes. Numerical solution of the FBSDE is challenging because the boundary condition of the adjoint process is specified at the terminal time, while the solution should be adaptable to the forward in time filtration of a Wiener process. In this paper, a "time-reversal" of the FBSDE system is proposed that involves integration with respect to a backward in time Wiener process. The time-reversal is used to propose an iterative Monte-Carlo procedure to solves the FBSDE system and its time-reversal simultaneously. The procedure involves approximating the {F\"ollmer's drift} and solving a regression problem between the state and its adjoint at each time. The procedure is illustrated for the linear quadratic (LQ) optimal control problem with a numerical example.