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Martingale representation theorem

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The theorem only asserts the existence of the representation and does not help to find it explicitly; it is possible in many cases to determine the form of the representation using
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and it is easy to check that the strategy is self-financing: the change in the value of the portfolio only depends on the change of the asset prices
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The martingale representation theorem can be used to establish the existence of a
87: 823:{\displaystyle \int _{0}^{T}\varphi _{t}^{2}\sigma _{t}^{2}\,dt<\infty } 1326:{\displaystyle \left(dV_{t}=\varphi _{t}\,dS_{t}+\psi _{t}\,dB_{t}\right)} 554:{\displaystyle E(X|{\mathcal {G}}_{t})=E(X)+\int _{0}^{t}C_{s}\,dB_{s}.} 1354:
Montin, Benoît. (2002) "Stochastic Processes Applied in Finance"
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Zeitschrift für Wahrscheinlichkeitstheorie und verwandte Gebiete
1229:{\displaystyle V_{T}=\varphi _{T}S_{T}+\psi _{T}B_{T}=C_{T}=X} 915:{\displaystyle N_{t}=N_{0}+\int _{0}^{t}\varphi _{s}\,dM_{s}.} 15: 218:{\displaystyle (\Omega ,{\mathcal {F}},{\mathcal {F}}_{t},P)} 720: 477: 340: 298: 235: 195: 184: 1067:
is the stock price discounted by the bond price to time
440:{\displaystyle X=E(X)+\int _{0}^{\infty }C_{s}\,dB_{s}.} 704:{\displaystyle \left(N_{t}\right)_{0\leq t<\infty }} 620:{\displaystyle \left(M_{t}\right)_{0\leq t<\infty }} 1029:{\displaystyle \psi _{t}B_{t}=C_{t}-\varphi _{t}Z_{t}} 1245: 1150: 1120: 1093: 1073: 1046: 969: 935: 843: 761: 741: 717: 663: 636: 579: 459: 373: 336: 294: 266: 231: 172: 138: 1325: 1228: 1126: 1106: 1079: 1059: 1028: 948: 914: 822: 747: 727: 703: 649: 619: 553: 439: 356: 311: 272: 248: 217: 151: 1114:is the expected payoff of the option at time 8: 755:, unique up to sets of measure 0, such that 925:The replicating strategy is defined to be: 711:is any other Q-martingale, there exists an 288:random variable measurable with respect to 1343:Backward stochastic differential equation 1312: 1304: 1298: 1285: 1277: 1271: 1258: 1244: 1214: 1201: 1191: 1178: 1168: 1155: 1149: 1119: 1098: 1092: 1072: 1051: 1045: 1020: 1010: 997: 984: 974: 968: 940: 934: 903: 895: 889: 879: 874: 861: 848: 842: 807: 801: 796: 786: 781: 771: 766: 760: 740: 719: 718: 716: 683: 673: 662: 641: 635: 599: 589: 578: 542: 534: 528: 518: 513: 482: 476: 475: 469: 458: 428: 420: 414: 404: 399: 372: 345: 339: 338: 335: 303: 297: 296: 293: 265: 240: 234: 233: 230: 200: 194: 193: 183: 182: 171: 143: 137: 66:Learn how and when to remove this message 312:{\displaystyle {\mathcal {G}}_{\infty }} 29:This article includes a list of general 102:with respect to this Brownian motion. 86:states that a random variable that is 7: 357:{\displaystyle {\mathcal {G}}_{t},} 817: 696: 612: 405: 304: 249:{\displaystyle {\mathcal {G}}_{t}} 176: 35:it lacks sufficient corresponding 14: 1141:, the value of the portfolio is: 627:is a Q-martingale process, whose 84:martingale representation theorem 112:Similar theorems also exist for 20: 956:units of the stock at the time 728:{\displaystyle {\mathcal {F}}} 503: 497: 488: 470: 463: 389: 383: 212: 173: 98:can be written in terms of an 1: 657:is always non-zero. Then, if 949:{\displaystyle \varphi _{t}} 650:{\displaystyle \sigma _{t}} 1399: 830:with probability one, and 165:filtered probability space 116:on filtrations induced by 748:{\displaystyle \varphi } 573:strategy. Suppose that 50:more precise citations. 1327: 1230: 1137:At the expiration day 1128: 1108: 1081: 1061: 1030: 950: 916: 824: 749: 729: 705: 651: 621: 565:Application in finance 555: 441: 358: 319:, then there exists a 313: 274: 250: 219: 153: 1328: 1231: 1129: 1109: 1107:{\displaystyle C_{t}} 1082: 1062: 1060:{\displaystyle Z_{t}} 1031: 951: 917: 825: 750: 730: 706: 652: 622: 556: 442: 359: 314: 275: 251: 220: 154: 152:{\displaystyle B_{t}} 1383:Probability theorems 1243: 1148: 1118: 1091: 1071: 1044: 967: 933: 841: 759: 739: 735:-previsible process 715: 661: 634: 577: 457: 371: 334: 292: 264: 258:augmented filtration 229: 170: 136: 90:with respect to the 884: 834:can be written as: 806: 791: 776: 523: 409: 321:predictable process 1323: 1226: 1124: 1104: 1077: 1057: 1036:units of the bond. 1026: 946: 912: 870: 820: 792: 777: 762: 745: 725: 701: 647: 617: 551: 509: 437: 395: 354: 309: 270: 246: 215: 149: 120:, for example, by 107:Malliavin calculus 80:probability theory 1378:Martingale theory 1127:{\displaystyle t} 1080:{\displaystyle t} 286:square integrable 273:{\displaystyle B} 76: 75: 68: 1390: 1332: 1330: 1329: 1324: 1322: 1318: 1317: 1316: 1303: 1302: 1290: 1289: 1276: 1275: 1263: 1262: 1235: 1233: 1232: 1227: 1219: 1218: 1206: 1205: 1196: 1195: 1183: 1182: 1173: 1172: 1160: 1159: 1133: 1131: 1130: 1125: 1113: 1111: 1110: 1105: 1103: 1102: 1086: 1084: 1083: 1078: 1066: 1064: 1063: 1058: 1056: 1055: 1035: 1033: 1032: 1027: 1025: 1024: 1015: 1014: 1002: 1001: 989: 988: 979: 978: 955: 953: 952: 947: 945: 944: 921: 919: 918: 913: 908: 907: 894: 893: 883: 878: 866: 865: 853: 852: 829: 827: 826: 821: 805: 800: 790: 785: 775: 770: 754: 752: 751: 746: 734: 732: 731: 726: 724: 723: 710: 708: 707: 702: 700: 699: 682: 678: 677: 656: 654: 653: 648: 646: 645: 626: 624: 623: 618: 616: 615: 598: 594: 593: 560: 558: 557: 552: 547: 546: 533: 532: 522: 517: 487: 486: 481: 480: 473: 446: 444: 443: 438: 433: 432: 419: 418: 408: 403: 363: 361: 360: 355: 350: 349: 344: 343: 330:with respect to 318: 316: 315: 310: 308: 307: 302: 301: 279: 277: 276: 271: 255: 253: 252: 247: 245: 244: 239: 238: 224: 222: 221: 216: 205: 204: 199: 198: 188: 187: 158: 156: 155: 150: 148: 147: 71: 64: 60: 57: 51: 46:this article by 37:inline citations 24: 23: 16: 1398: 1397: 1393: 1392: 1391: 1389: 1388: 1387: 1368: 1367: 1358:Elliott, Robert 1351: 1339: 1308: 1294: 1281: 1267: 1254: 1250: 1246: 1241: 1240: 1210: 1197: 1187: 1174: 1164: 1151: 1146: 1145: 1116: 1115: 1094: 1089: 1088: 1069: 1068: 1047: 1042: 1041: 1016: 1006: 993: 980: 970: 965: 964: 936: 931: 930: 899: 885: 857: 844: 839: 838: 757: 756: 737: 736: 713: 712: 669: 665: 664: 659: 658: 637: 632: 631: 585: 581: 580: 575: 574: 567: 538: 524: 474: 455: 454: 424: 410: 369: 368: 337: 332: 331: 295: 290: 289: 262: 261: 232: 227: 226: 192: 168: 167: 161:Brownian motion 139: 134: 133: 130: 96:Brownian motion 94:generated by a 72: 61: 55: 52: 42:Please help to 41: 25: 21: 12: 11: 5: 1396: 1394: 1386: 1385: 1380: 1370: 1369: 1366: 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146: 142: 129: 126: 118:jump processes 74: 73: 28: 26: 19: 13: 10: 9: 6: 4: 3: 2: 1395: 1384: 1381: 1379: 1376: 1375: 1373: 1364:, 36, 213–226 1363: 1359: 1356: 1353: 1352: 1348: 1344: 1341: 1340: 1336: 1334: 1319: 1313: 1309: 1305: 1299: 1295: 1291: 1286: 1282: 1278: 1272: 1268: 1264: 1259: 1255: 1251: 1247: 1223: 1220: 1215: 1211: 1207: 1202: 1198: 1192: 1188: 1184: 1179: 1175: 1169: 1165: 1161: 1156: 1152: 1144: 1143: 1142: 1140: 1135: 1121: 1099: 1095: 1074: 1052: 1048: 1021: 1017: 1011: 1007: 1003: 998: 994: 990: 985: 981: 975: 971: 962: 959: 941: 937: 928: 927: 926: 909: 904: 900: 896: 890: 886: 880: 875: 871: 867: 862: 858: 854: 849: 845: 837: 836: 835: 833: 814: 811: 808: 802: 797: 793: 787: 782: 778: 772: 767: 763: 742: 693: 690: 687: 684: 679: 674: 670: 666: 642: 638: 630: 609: 606: 603: 600: 595: 590: 586: 582: 572: 564: 548: 543: 539: 535: 529: 525: 519: 514: 510: 506: 500: 494: 491: 483: 466: 460: 453: 452: 451: 434: 429: 425: 421: 415: 411: 400: 396: 392: 386: 380: 377: 374: 367: 366: 365: 351: 346: 329: 325: 322: 287: 283: 267: 260:generated by 259: 241: 209: 206: 201: 189: 179: 166: 162: 144: 140: 127: 125: 123: 122:Markov chains 119: 115: 110: 108: 103: 101: 97: 93: 89: 85: 81: 70: 67: 59: 49: 45: 39: 38: 32: 27: 18: 17: 1361: 1238: 1138: 1136: 1039: 957: 924: 831: 568: 449: 323: 281: 131: 111: 104: 100:Itô integral 83: 77: 62: 56:October 2011 53: 34: 114:martingales 48:introducing 1372:Categories 1349:References 629:volatility 364:such that 92:filtration 88:measurable 31:references 1296:ψ 1269:φ 1189:ψ 1166:φ 1008:φ 1004:− 972:ψ 938:φ 887:φ 872:∫ 818:∞ 794:σ 779:φ 764:∫ 743:φ 697:∞ 688:≤ 639:σ 613:∞ 604:≤ 511:∫ 406:∞ 397:∫ 326:which is 305:∞ 177:Ω 128:Statement 1337:See also 225:and let 571:hedging 328:adapted 256:be the 44:improve 1040:where 82:, the 33:, but 963:hold 960:, and 929:hold 284:is a 280:. If 159:be a 1087:and 815:< 694:< 610:< 132:Let 124:. 78:In 1374:: 1333:. 1134:. 109:. 1320:) 1314:t 1310:B 1306:d 1300:t 1292:+ 1287:t 1283:S 1279:d 1273:t 1265:= 1260:t 1256:V 1252:d 1248:( 1224:X 1221:= 1216:T 1212:C 1208:= 1203:T 1199:B 1193:T 1185:+ 1180:T 1176:S 1170:T 1162:= 1157:T 1153:V 1139:T 1122:t 1100:t 1096:C 1075:t 1053:t 1049:Z 1022:t 1018:Z 1012:t 999:t 995:C 991:= 986:t 982:B 976:t 958:t 942:t 910:. 905:s 901:M 897:d 891:s 881:t 876:0 868:+ 863:0 859:N 855:= 850:t 846:N 832:N 812:t 809:d 803:2 798:t 788:2 783:t 773:T 768:0 721:F 691:t 685:0 680:) 675:t 671:N 667:( 643:t 607:t 601:0 596:) 591:t 587:M 583:( 549:. 544:s 540:B 536:d 530:s 526:C 520:t 515:0 507:+ 504:) 501:X 498:( 495:E 492:= 489:) 484:t 478:G 471:| 467:X 464:( 461:E 435:. 430:s 426:B 422:d 416:s 412:C 401:0 393:+ 390:) 387:X 384:( 381:E 378:= 375:X 352:, 347:t 341:G 324:C 299:G 282:X 268:B 242:t 236:G 213:) 210:P 207:, 202:t 196:F 190:, 185:F 180:, 174:( 145:t 141:B 69:) 63:( 58:) 54:( 40:.

Index

references
inline citations
improve
introducing
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probability theory
measurable
filtration
Brownian motion
Itô integral
Malliavin calculus
martingales
jump processes
Markov chains
Brownian motion
filtered probability space
augmented filtration
square integrable
predictable process
adapted
hedging
volatility
Backward stochastic differential equation
Elliott, Robert
Categories
Martingale theory
Probability theorems

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