A Change-of-Variable Formula with Local Time on Curves

Goran Peskir ()
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Goran Peskir: Danish National Research Foundation

Journal of Theoretical Probability, 2005, vol. 18, issue 3, 499-535

Abstract: Abstract Let $$X = (X_t)_{t \geq 0}$$ be a continuous semimartingale and let $$b: \mathbb{R}_+ \rightarrow \mathbb{R}$$ be a continuous function of bounded variation. Setting $$C = \{(t, x) \in \mathbb{R} + \times \mathbb{R} | x b(t)\}$$ suppose that a continuous function $$F: \mathbb{R}_+ \times \mathbb{R} \rightarrow \mathbb{R}$$ is given such that F is C1,2 on $$\bar{C}$$ and F is $$C^{1,2}$$ on $$\bar{D}$$ . Then the following change-of-variable formula holds: $$\eqalign{ F(t,X_t) = F(0,X_0)+\int_0^{t} {1 \over 2} (F_t(s, X_s+) + F_t(s,X_s-)) ds\cr + \int_0^t {1 \over 2} (F_x(s,X_s+) + F_x(s,X_s-))dX_s\cr + {1 \over 2} \int_0^t F_{xx} (s,X_s)I (X_s \neq b(s)) d \langle X, X \rangle_s\cr + {1 \over 2} \int_0^t (F_x(s,X_s+)-F_x(s,X_s-)) I(X_s = b(s)) d\ell_{s}^{b} (X),\cr} $$ where $$\ell_{s}^{b}(X)$$ is the local time of X at the curve b given by $$\ell_{s}^{b}(X) = \mathbb{P} - \lim_{\varepsilon \downarrow 0} {1 \over 2 \varepsilon} \int_0^s I(b(r)- \varepsilon

Keywords: Itô’s formula; Tanaka’s formula; local time; curve; Brownian motion; diffusion; continuous semimartingale; stochastic integral; weak convergence; signed measure; free-boundary problems; optimal stopping (search for similar items in EconPapers)
Date: 2005
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Citations: View citations in EconPapers (13)

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DOI: 10.1007/s10959-005-3517-6

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