A singular stochastic control problem with interconnected dynamics

In this paper we study a Markovian two-dimensional bounded-variation stochastic control problem whose state process consists of a difusive mean-reverting component and of a purely controlled one. The main problem's characteristic lies in the interaction of the two components of the state process: the mean-reversion level of the difusive component is an afne function of the current value of the purely controlled one. By relying on a combination of techniques from viscosity theory and free-boundary analysis, we provide the structure of the value function and we show that it satisfes a second-order smooth-ft principle. Such a regularity is then exploited in order to determine a system of functional equations solved by the two monotone continuous curves (free boundaries) that split the control problem's state space into three connected regions. Further properties of the free boundaries are also obtained.