Penalization of Reflected SDEs and Neumann Problems of HJB Equations

Abstract: In this paper we first study the penalization approximation of stochastic differential equations reflected in a domain which satisfies conditions (A) and (B) and prove that the sequence of solutions of the penalizing equations converges in the uniform topology to the solution of the corresponding reflected stochastic differential equation. Then by using this convergence result, we consider partial differential equations with Neumann boundary conditions in domains neither smooth nor convex and prove the existence and comparison principle of viscosity solutions of such nonlinear PDEs. Also, by applying the support of reflected diffusions established in \cite{ren-wuAP}, we establish the maximum principle for the viscosity solutions of linear PDEs with Neumann boundary conditions.