On the Singular Control of a Diffusion and Its Running Infimum or Supremum

Abstract.

We study a class of singular stochastic control problems for a one-dimensional diffusion [Formula: see text] in which the performance criterion to be optimized depends explicitly on the running infimum [Formula: see text] (or supremum [Formula: see text]) of the controlled process. We introduce two novel integral operators that are consistent with the Hamilton–Jacobi–Bellman equation for the resulting two-dimensional singular control problems. The first operator involves integrals where the integrator is the control process of the two-dimensional process [Formula: see text] or [Formula: see text]; the second operator concerns integrals where the integrator is the running infimum or supremum process itself. Using these definitions, we prove a general verification theorem for problems involving two-dimensional state-dependent running costs, costs of controlling the process, costs of increasing the running infimum (or supremum) and exit times. Finally, we apply our results to explicitly solve an optimal dividend problem in which the manager’s time-preferences depend on the company’s historical worst performance.