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Monday, June 6, 2011

About Stochastic and Not-So-Stochastic Integrals

Here we consider 3 kinds of integrals. Suppose W is a Brownian motion, f is a stochastic function and g is a deterministic function.

1. \int_t^T W_s ds
This entity turns out to be a normally distributed random variable, distributed as N(0, T^3 /3 ). [Missing: proof , can be found in Crack's HOTS pp. 154]

2. \int_t^T g dW_s
This is not only a martingale, but also a normally distributed random variable N(0, \int_t^T g^2 ds ).

3. \int_t^T f dW_s
This is a martingale, but the distribution is not (necessarily) normal.

One implication of 2. versus 3. is this.

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