Conic Martingales from Stochastic Integrals

Frédéric Vrins and Monique Jeanblanc

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Abstract: In this paper we introduce the concept of conic martingales}. This class refers to stochastic processes having the martingale property, but that evolve within given (possibly time-dependent) boundaries. We first review some results about the martingale property of solution to driftless stochastic differential equations. We then provide a simple way to construct and handle such processes. Specific attention is paid to martingales in $[0,1]$. One of these martingales proves to be analytically tractable. It is shown that up to shifting and rescaling constants, it is the only martingale (with the trivial constant, Brownian motion and Geometric Brownian motion) having a separable coefficient $\sigma(t,y)=g(t)h(y)$ and that can be obtained via a time-homogeneous mapping of Gaussian diffusions. The approach is exemplified to the modeling of stochastic conditional survival probabilities in the univariate (both conditional and unconditional to survival) and bivariate cases.

Date: 2016-03
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Related works:
Journal Article: Conic martingales from stochastic integrals (2018)
Working Paper: Conic martingales from stochastic integrals (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:1603.07488

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