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Assignment 2: Stochastic Analysis MATH4512 1. Let (Wt,Ft) be a Brownian motion. (a) Find f(x) such that f(Wt + t) is a martingale. (b) Find an increasing process A such that f(Wt + t) = BAt for some Brownian motion B. 2. Consider a diffusion X with drift coefficient µ(x) = cx and diffusion coefficient σ(x) = 1. Give its generator and show that X2t − 2c ∫ t 0 X2sds− t is a martingale. 3. Let (Wt) be a Brownian motion, (Lt) be its local time at 0 and (St) be its running supremum. (a) Is the process Yt = StW 4 t a semimartingale? If yes, find its semimartingale decomposition. (b) Show that the process Zt = L 3/2 t − 32L1/2t |Wt| is a local martingale. 4. Let W be a Brownian motion and (Ft) be its natural filtration on (Ω,F ,P). (a) Find the predictable representation of W 51 with respect to W . (b) Show that there is a unique solution X satisfying the following SDE with σ > 0{ dXs = σXsdWs X0 = 1. Then prove that X is a true martingale. (c) Show that (Ft) has PRP with respect to X. (d) Find the predictable representation of W 51 with respect to X. (e) Define Q by dQdP |Ft = Xt. Does (Ft) have PRP under Q? If the answer is yes, provide a Q-martingale having PRP for (Ft). 5. Question 35 in MRLN Let W be a one-dimensional standard Brownian motion defined on a filtered probability space (Ω, (Ft),P). Consider the following SDEs dXt = 3X 1 3 dt+ 3X 2 3 dWt, X0 = 0, (1) and { dY 1t = − 12Y 1t dt+ sgn(Y 2t ) √ 1− (Y 1t )2dWt, Y 10 = 0 dY 2t = − 12Y 2t dt− sgn(Y 1t ) √ 1− (Y 2t )2dWt, Y 20 = 1 (2) Apply Itoˆ’s formula to answer the following questions. (a) Show that the process Xt =W 3 t satisfies (1). (b) Show that the process (Y 1t , Y 2 t ) = (sin(Wt), cos(Wt)) satisfies (2). (c) Find the semimartingale representation of the process Zt = (Y 1 t ) 2 and its quadratic variation ⟨Z⟩t. (d) Find the local martingale part of the process Ut = exp(Xt) and the cross-variation between Z and U .