A stochastic linear-quadratic differential game with time-inconsistency

Abstract

We consider a general stochastic linear-quadratic differential game with time-inconsistency. The time-inconsistency arises from the presence of quadratic terms of the expected state as well as state-dependent term in the objective functionals. We define an equilibrium strategy, which is different from the classical one, and derive a sufficient condition for equilibrium strategies via a system of forward-backward stochastic differential equation. When the state is one-dimensional and the coefficients are all deterministic, we find an explicit equilibrium strategy. The uniqueness of such equilibrium strategy is also given.

Keywords

• time-inconsistency
• stochastic linear-quadratic differential game
• equilibrium strategy
• bsde
• forward-backward stochastic differential equation