Second Order Backward Stochastic Differential Equations under Monotonicity Condition

Abstract

In a recent paper, Soner, Touzi and Zhang [20] have introduced a notion of second order backward stochastic differential equations (2BSDEs for short), which are naturally linked to a class of fully non-linear PDEs. They proved existence and uniqueness for a generator which is uniformly Lipschitz in the variables $y$ and $z$. The aim of this paper is to extend these results to the case of a generator satisfying a monotonicity condition in $y$. More precisely, we prove existence and uniqueness for 2BSDEs with a generator which is Lipschitz in $z$ and uniformly continuous with linear growth in $y$. Moreover, we emphasize throughout the paper the major difficulties and differences due to the 2BSDE framework.

29 pages, to appear in Stochastic Processes and their Applications

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• A theoretical framework for the pricing of contingent claims in the presence of model uncertainty
• Dual formulation of second order target problems