Generalized Gaussian Bridges

Tommi Sottinen () and Adil Yazigi

Papers from arXiv.org

Abstract: A generalized bridge is the law of a stochastic process that is conditioned on N linear functionals of its path. We consider two types of representations of such bridges: orthogonal and canonical. The orthogonal representation is constructed from the entire path of the underlying process. Thus, future knowledge of the path is needed. The orthogonal representation is provided for any continuous Gaussian process. In the canonical representation the filtrations and the linear spaces generated by the bridge process and the underlying process coincide. Thus, no future information of the underlying process is needed. Also, in the semimartingale case the canonical bridge representation is related to the enlargement of filtration and semimartingale decompositions. The canonical representation is provided for the so-called prediction-invertible Gaussian processes. All martingales are trivially prediction-invertible. A typical non-semimartingale example of a prediction-invertible Gaussian process is the fractional Brownian motion. We apply the canonical bridges to insider trading.

Date: 2012-05, Revised 2013-11
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Journal Article: Generalized Gaussian bridges (2014)
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