### Abstract

Motivated by earlier work on the use of fully-coupled forward-backward stochastic differential equations (henceforth FBSDEs) in the analysis of mathematical models for the CO_{2} emissions markets, the present study is concerned with the analysis of these equations when the generator of the forward equation has a conservative degenerate structure and the terminal condition of the backward equation is a non-smooth function of the terminal value of the forward component. We show that a general form of existence and uniqueness result still holds. When the function giving the terminal condition is binary, we also show that the flow property of the forward component of the solution can fail at the terminal time. In particular, we prove that a Dirac point mass appears in its distribution, exactly at the location of the jump of the binary function giving the terminal condition. We provide a detailed analysis of the breakdown of the Markovian representation of the solution at the terminal time.

Original language | English (US) |
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Pages (from-to) | 333-388 |

Number of pages | 56 |

Journal | Probability Theory and Related Fields |

Volume | 157 |

Issue number | 1-2 |

DOIs | |

State | Published - Oct 2013 |

### All Science Journal Classification (ASJC) codes

- Analysis
- Statistics and Probability
- Statistics, Probability and Uncertainty

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## Cite this

*Probability Theory and Related Fields*,

*157*(1-2), 333-388. https://doi.org/10.1007/s00440-012-0459-7