Stochastic Optimal Control Problem under Inside Information

Abstract

This paper is concerned with a stochastic optimal control problem under inside information. The control process depends on an $\mathcal{F}_{T_0}$-measurable random variable $Y$, representing the static inside information, and is adapted to the enlarged filtration generated by the underlying Brownian motion and the random variable $Y$. Accordingly, the traditional stochastic integral fails to be well-defined in this non-adapted setting; we adopt forward integrals to formulate the stochastic integral terms in the system. By means of the Donsker delta function, the original controlled system is transformed into a $y$-parameterized system. We further establish the existence of solutions to forward \textit{stochastic differential equations} (SDEs), and prove the uniqueness of solutions via flow transformation techniques. Under a Gaussian assumption on $Y$, we derive both necessary and sufficient optimality conditions for the aforementioned control problem. Subsequently, we formulate the \textit{linear-quadratic} (LQ) optimal control problem under inside information. Through the $y$-parameterized transformation, the original problem is converted into an LQ control problem with random coefficients. A numerical example for the LQ case is provided at the end to validate our theoretical findings.