Tag Archives: JCM_math545_HW4_S23

Part I

1. Let \(f(x,y):\mathbb{R}^2 \rightarrow \mathbb{R}\) be a twice differentiable function in both \(x\) and \(y\). Let \(M(t)\) be defined by \[M(t)=\int_0^t \sigma(s,\omega) dB(s,\omega)\]. Assume that \(\sigma(t,\omega)\) is adapted and that \(\mathbb{E} M^2 < \infty\) for all \(t\) a.s. .(Here \(B(t)\) is standard Brownian Motion.) Let \(\langle M \rangle(t)\) be the quadratic variation process of \(M(t)\). What equation does \(f\) have to satisfy so that \(Y(t)=f(M(t),\langle M \rangle(t))\) is again a martingale if we assume that \(\mathbf E\int_0^t \sigma(s,\omega)^2 ds < \infty\).
2. Set
   \begin{align*}
   f_n(x,y) = \sum_{0 \leq m \leq \lfloor n/2 \rfloor} C_{n,m} x^{n-2m}y^m
   \end{align*}
   here \(\lfloor n/2 \rfloor\) is the largest integer less than or equal to \(n/2\). Set \(C_{n,0}=1\) for all \(n\). Then find a recurrence relation for \(C_{n,m+1}\) in terms of \(C_{n,m}\), so that \(Y(t)=f_n(B(t),t)\) will be a martingale.Write out explicitly \(f_1(B(t),), \cdots, f_4(B(t),t)\) as defined in the previous item.

Part II

Now consider \(I(t)\) defined by \[I(t)=\int_0^t \sigma(s,\omega)dB(s,\omega)\] where \(\sigma\) is adapted and \(|\sigma(t,\omega)| \leq K\) for all \(t\) with probability one. In light of the above let us set
\begin{align*}Y(t,\omega)=I(t)^4 – 6 I(t)^2\langle I \rangle(t) + 3 \langle I \rangle(t)^2 \ .\end{align*}

1. Quote  the problem “Ito Moments” to show that \(\mathbb{E}\{ |Y(t)|^2\} < \infty\) for all \(t\). Then use the first part of this problem to conclude that \(Y\) is a martingale.
2. Show that \[\mathbb{E}\{ I(t)^4 \} \leq 6 \mathbb{E} \big\{ \{I(t)^2\langle I \rangle(t) \big\}\]
3. Recall the Cauchy-Schwartz inequality. In our language it states that
   \begin{align*}
   \mathbb{E} \{AB\} \leq (\mathbb{E}\{A^2\})^{1/2} (\mathbb{E}\{B^2\})^{1/2}
   \end{align*}
   Combine this with the previous inequality to show that\begin{align*}\mathbb{E}\{ I(t)^4 \} \leq 36 \mathbb{E} \big\{\langle I \rangle(t)^2 \big\} \end{align*}
4. As discussed in class \(I^4\) is a submartingale (because \(x \mapsto x^4\) is convex). Use the Kolmogorov-Doob inequality and all that we have just derived to show that
   \begin{align*}
   \mathbb{P}\left\{ \sup_{0\leq s \leq T}|I(s)|^4 \geq \lambda \right\} \leq ( \text{const}) \frac{ \mathbb{E}\left( \int_0^T \sigma(s,\omega)^2 ds\right)^2 }{\lambda}
   \end{align*}