Infinite Horizon Fully Coupled Nonlinear Forward-Backward Stochastic Difference Equations and Their Application to LQ Optimal Control Problems

Abstract

This paper focuses on the study of infinite horizon fully coupled nonlinear forward-backward stochastic difference equations (FBS$\bigtriangleup$Es). Firstly, we establish a pair of priori estimates for the solutions to forward stochastic difference equations (S$\bigtriangleup$Es) and backward stochastic difference equations (BS$\bigtriangleup$Es), respectively. Then, to achieve broader applicability, we utilize a set of domination-monotonicity conditions that are more lenient than standard assumptions. Using these conditions, we apply continuation methods to prove the unique solvability of infinite horizon fully coupled FBS$\bigtriangleup$Es and derive a set of solution estimates. Furthermore, our results have considerable implications for a variety of related linear quadratic (LQ) problems, especially when the stochastic Hamiltonian system is consistent with FBS$\bigtriangleup$Es satisfying the introduced domination-monotonicity conditions. Thus, by solving the associated stochastic Hamiltonian system, we explicitly characterize the unique optimal control. This is the first work establishing solvability of fully coupled nonlinear FBS$\bigtriangleup$Es under domination-monotonicity conditions in infinite horizon discrete-time setting.