Degenerate variance control of a one-dimensional diffusion

Consider an Ito equation for a scalar-valued process that is controlled thr ough a dynamic and adaptive choice of its diffusion coefficient. Such a con trol is called a variance control and is said to degenerate when it becomes zero. We consider the problem of choosing a control to minimize a discount ed, infinite-horizon cost that penalizes state values close to an equilibri um point of the drift and also imposes a control cost. Admissible controls are required to take values in the closed, bounded interval [0, sigma(0)], where sigma(0) > 0; in particular, the control can be degenerate. In genera l, there will be a bang-bang optimal control that takes the value 0 in some open set and is zero otherwise. We discuss the existence and properties of solutions to stochastic differential equations with such controls and char acterize the value function and optimal control in more detail, in the case of both linear and nonlinear drift. Employing the Hamilton Jacobi Bellman equation and results of [N. V. Krylov, Theory Probab. Appl., 17 (1973), pp. 114-131] and [ P.-L. Lions, Comm. Pure Appl. Math., 34 (1981), pp. 121-147 ], we derive sufficient conditions for the existence of single-region optim al controls, construct examples of multiple-region controls, and provide bo unds on the number and size of the regions in which the optimal control is positive.