By Ludovic Moreau Stochastic Target Problems with Controlled Loss in Jump Diffusion Models

In this paper, we consider a mixed diffusion version of the stochastic target problem introduced in [3]. This consists in finding the minimum initial value of a controlled process which guarantees to reach a controlled stochastic target with a given level of expected loss. As in [3], it can be converted into a standard stochastic target problem, as already studied in [10], [9] or [2] for the mixed diffusion case, by increasing both the state space and the dimension of the control. In our mixed-diffusion setting, the main difficulty comes from the presence of jumps, which leads to the introduction of a new kind of controls that take values in an unbounded set of measurable maps. This has non trivial technical impacts on the formulation and derivation of the associated partial differential equations.

Key words: Stochastic target problem, mixed diffusion process, discontinuous viscosity solu- tions, quantile hedging.