Small-time solvability of a flow of forward-backward stochastic differential equations

Abstract

Motivated from time-inconsistent stochastic control problems, we introduce a new type of coupled forward-backward stochastic systems, namely, flows of forward-backward stochastic differential equations. They are systems consisting of a single forward SDE and a continuum of BSDEs, which are defined on different time-intervals and connected via an equilibrium condition. We formulate a notion of equilibrium solutions in a general framework and prove small-time well-posedness of the equations. We also consider discretized flows and show that their equilibrium solutions approximate the original one, together with an estimate of the convergence rate.

20 pages