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Collaborative Review Task M1

This document contains solutions to three problems: 1. It shows that the Brownian motion Wt is a martingale by showing it satisfies the properties of being adapted to the filtration Ft and having increments independent of past information. 2. It shows the process Xtα = exp(αWt - α2t/2) is a martingale using the properties of exponential martingales. 3. It defines polynomials Hn(x,y) using Taylor series and shows the process Fn(Wt) is a martingale for each n by showing its expectation conditioned on past information Fs is equal to Fn(Ws).

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Abdullah Abdullah
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91 views3 pages

Collaborative Review Task M1

This document contains solutions to three problems: 1. It shows that the Brownian motion Wt is a martingale by showing it satisfies the properties of being adapted to the filtration Ft and having increments independent of past information. 2. It shows the process Xtα = exp(αWt - α2t/2) is a martingale using the properties of exponential martingales. 3. It defines polynomials Hn(x,y) using Taylor series and shows the process Fn(Wt) is a martingale for each n by showing its expectation conditioned on past information Fs is equal to Fn(Ws).

Uploaded by

Abdullah Abdullah
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Let 𝑊 = {𝑊𝑡 : 𝑡 ≥ 0} be a Brownian motion on (Ω, ℱ,𝔽 = (ℱ𝑡 )𝑡≥0 , ).

1. Show that is an -martingale.

Solution,

Here,

As, W is a Brownian motion W0=0

i. 0≤s≤t F(s)⊂F(t)
ii. {w(t) must be adapted to the filtration.
iii. 0≤s≤t, then w(u)-w(t) is independent of F(t). from which we can prove that W is an
-martingale as follows,

0≤s≤t

= E[W𝑡|𝐹(𝑠)]

= E[(W𝑡) − W(𝑠) + W(s)|F(s)]

= E[(W𝑡) − W(s)|F(s)] + E[W(𝑠)|F(𝑠)]

= E[(W𝑡) − W(s)|F(s)] + E[W(𝑠)|F(𝑠)]

= E[(W𝑡) − W(s)] + W(s)

=0+W(s)

=W(s)

Hence, proved that W is an F martingale.

2. Show that for every , the process


1
𝑋𝑡𝛼 = exp (𝛼𝑊𝑡 − 2 𝛼 2 𝑡)

is an -martingale.

Solution,

Here,

The problem is an exponential martingale.

1
𝑋𝑡𝛼 = exp (𝛼𝑊(𝑡) − 𝛼 2 𝑡) 𝛼>0
2
0≤s≤t

1
𝐸[𝑋𝑡𝛼 |F(𝑠)] = E[exp (𝛼𝑊(𝑡) − 𝛼 2 𝑡) |F(𝑠)]
2

1
= E[exp (𝛼(𝑊(𝑡) − W(s)). exp (𝛼W(s) − 𝛼 2 𝑡) |F(𝑠)]
2

1
= exp (𝛼W(s) − 𝛼 2𝑡). E[exp (𝛼W(t) − W(s)]|F(𝑠))
2

1
= exp (𝛼W(s) − 𝛼 2 𝑡). E[exp (𝛼W(t) − W(s))]
2

1 1
= exp (𝛼W(s) − 𝛼 2 𝑡). exp ( 𝛼 2 (𝑡 − 𝑠)
2 2

1
= exp (𝛼W(s) − 𝛼 2 s))
2

= 𝑋𝑠𝛼

1
Hence, proved that 𝑋𝑡𝛼 = exp (𝛼𝑊𝑡 − 𝛼 2 𝑡) is an 𝔽-martingale.
2

3. Define the polynomials Hn(x,y);n=0,1,2,… by

It can be shown (using Taylor series) that

We now show that is a martingale for each .

(a) Let 0≤s≤t and α∈ℝ.


For each F∈s
∫FXαtdℙ=∫FXαsdℙ.

(b) By differentiating (3a) on both sides n times with respect to and interchanging the derivative
with the integral
(c) Hence, is a martingale.

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