Remarks on the stochastic integral

Rajeeva L. Karandikar ()
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Rajeeva L. Karandikar: Chennai Mathematical Institute

Indian Journal of Pure and Applied Mathematics, 2017, vol. 48, issue 4, 469-493

Abstract: Abstract In Karandikar-Rao [11], the quadratic variation [M, M] of a (local) martingale was obtained directly using only Doob’s maximal inequality and it was remarked that the stochastic integral can be defined using [M, M], avoiding using the predictable quadratic variation 〈M, M〉 (of a locally square integrable martingale) as is usually done. This is accomplished here- starting with the result proved in [11], we construct ∫ f dX where X is a semimartingale and f is predictable and prove dominated convergence theorem (DCT) for the stochastic integral. Indeed, we characterize the class of integrands f for this integral as the class L(X) of predictable processes f such that |f| serves as the dominating function in the DCT for the stochastic integral. This observation seems to be new. We then discuss the vector stochastic integral ∫ 〈f, dY〉 where f is ℝ d valued predictable process, Y is ℝ d valued semimartingale. This was defined by Jacod [6] starting from vector valued simple functions. Memin [13] proved that for (local) martingales M1, … M d : If N n are martingales such that N t n → N t for every t and if ∃f n such that N t n = ∫ 〈f n , dM〉, then ∃f such that N = ∫ 〈f, dM〉. Taking a cue from our characterization of L(X), we define the vector integral in terms of the scalar integral and then give a direct proof of the result due to Memin stated above. This completeness result is an important step in the proof of the Jacod-Yor [4] result on martingale representation property and uniqueness of equivalent martingale measure. This result is also known as the second fundamental theorem of asset pricing.

Keywords: Martingales; semimartingales; stochastic integral (search for similar items in EconPapers)
Date: 2017
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DOI: 10.1007/s13226-017-0241-8

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