Proving regularity of the minimal probability of ruin via a game of stopping and control

We will reveal an interesting convex duality relationship between (a) minimizing the probability of lifetime ruin when the rate of consumption is stochastic and when the individual can invest in a Black-Scholes financial market; (b) a controller-and-stopper problem: the controller controls the drift and volatility of a process in order to maximize a running reward based on that process, the stopper chooses the time to stop the running reward and rewards the controller a final amount at that time. Our primary goal is to show that the minimal probability of ruin, whose stochastic representation does not have a classical form as the utility maximization problem (i.e. the objective’s dependence on the initial values of the state variables is implicit), is the unique classical solution of its Hamilton-Jacobi-Bellman (HJB) equation, which is a non-linear boundary-value problem. We establish our goal by exploiting the convex duality relationship between (a) and (b). MSC 2000 Classification: Primary 93E20, 91B28; Secondary 60G40. JEL Classification: Primary G11; Secondary C61.