Day 2

Stochastic Calculus I
Semyon Malamud
SFI EPFL
semyon.malamud@ep.ch
Stochastic Calculus I, September 2013
Semyon Malamud (EPFL) Day 2 September 2013 1 / 22
Borel Measurability
Emile Borel. French mathematician; Minister of Marine; member of

the French Resistance (1871-1956)
Famous for the innite monkey theorem
Some Properties of Borel Measurability
The set { : X a} is an event
The set { : X > a} is an event
The sets { : X (a, b)} and { : X (a, b)}
Borel =algebra is the minimal -algebra, generated by (a, +)
For any Borel set B R, X
1
(B) is an event
for two r.v. X, Y, the sets { : X Y } and { : X < Y } are events
for any r.v. (X
1
, , X
n
), the set { : (X
1
, , X
n
) B} is an
event for any Borel subset B R
n
for any Borel function f : R
n
R
1
, f(X
1
, , X
n
) is a random
variable
Expectation
E[I
A
] = P(A)
for a simple variable (c
k
are arbitrary constants)
X =
k
c
k
I
A
k
we dene
E[X] =
k
c
k
P(A
k
)
for a general X pick a sequence of simple X
i
converging to X and
dene
E[X] = lim
i
E[X
i
]
Careful with convergence !
Expectations as integrals
we can write
E[X] =
X() dP()
E[f(X)] =
f(X()) dP()
dene the cumulative distribution function
F
X
(a) = P(X < a) = E[I
X<a
]
Then
E[f(X)] =
R
f(x) dF
X
(x)
if the density
p
X
(x)
def
=
dF
X
(x)
dx
exists then
E[f(X)] =
R
f(x) p
X
(x) dx
Moment Generating Function
M() = E[e
X
]
Moments
E[X
n
] =
d
n
d
n
M()|
0
Fourier Transform = Characteristic Function is
M(i)
Example: Moments of a symmetric variable
For any random variable X with a density p(x) which is symmetric, i.e.,
p(x) = p(x), we have
E[X
k
] =
x
k
p(x)dx = {x = y, dx = dy}
=

+
(y)
k
p(y)(dy)
= (1)
k
y
k
p(y)dy = (1)
k
E[X
k
] . (1)
Thus, E[X
k
] = 0 for odd k.
Holders Inequality
Otto Holder. German mathematician (1859 - 1937)
Holders Inequality
Theorem
E[|XY |] (E[|X|
p
])
1/p
(E[|X|
q
])
1/q
for any p, q > 1 such that p
1
+ q
1
= 1.
Proof using the fact that log is a concave function, we get
log(p
1
a
p
+ q
1
b
q
) p
1
log(a
p
) + q
1
log(b
q
) = log(ab)
the Young inequality
p
1
a
p
+ q
1
b
q
ab
for a, b > 0. Therefore,
1 = E
p
1
X
E[|X|
p
]
1/p
p
+ q
1
Y
E[|Y |
q
]
1/q
X
E[|X|
p
]
1/p
Y
E[|Y |
q
]
1/q
=
E[|XY |]
(E[|X|
p
])
1/p
(E[|X|
q
])
1/q
(2)
Variance and correlation
variance
Var(X)
def
= E[X
2
] E[X]
2
= E[(X E[X])
2
]
covariance
Cov(X , Y )
def
= E[X Y ] E[X] E[Y ] = E[(XE[X]) (Y E[Y ])]
correlation
Corr(X , Y ) =
Cov(X , Y )
Var(X)
1/2
Var(Y )
1/2
Corr [1, 1]
By Holders inequality,
|Cov(X , Y )| Var(X)
1/2
Var(Y )
1/2
Jensens Inequality
Johan Jensen, (1859 - 1925) was a Danish engineer at Bell Telephone
did math for fun as a hobby
Jensens inequality
Theorem If f(x) is convex then
E[f(X)] f(E[X])
L
-norms and spaces

We dene
X
L
= E[|X|
]
1/
.
Monotonicity of Norms
Let < . Then, with p = /, Holders inequality implies
E[|X|
1] E[|X|
]
1/p
E[1]
1/q
.
Essential Supremum
esssup X = inf
A,P(A)=0
sup
\A
X
Lemma For any > 0 there exists a set A with P(A) > 0 such that
X

X on A.
lim
E[X
]
1/
= esssup X for X 0
Proof We have
(E[X
])
1/
esssup X .
By the denition of

X
def
= esssup X, for any > 0 there exists a set A
with P(A) > 0 such that
X

X on A.
Hence,
E[X
] E[I
A
X
] (

X )
P(A)
and hence,
lim
(E[X
])
1/
lim
(

X ) (P(A))
1/
=

X
Since > 0 is arbitrary, we get lim
(E[X
])
1/
= esssup X.
Convergence of random variables
almost sure convergence
X
n
X a.s.
convergence in probability
lim
n
P(|X
n
X| > ) = 0
for any > 0.
L
p
-convergence
lim
n
E[|X
n
X|
p
] = 0
Theorem Almost sure convergence implies convergence in probability.
Chebyshev inequality
Pafnuty Chebyshev (1821-1894). Father of Russian Mathematics
Chebyshev inequality
Theorem We have
P(|X| > ) <
p
E[ |X|
p
]
Corollary 1 Convergence in L
p
implies convergence in probability.
Corollary 2
P(|X E[X]| > ) <
2
Var(X)
Independence
r.v. X and Y are independent if
P((X A) (Y B)) = P(X A) P(Y B)
for any A, B R
equivalently,
E[f(X) g(Y )] = E[f(X)] E[g(Y )]
for any f, g
if X and Y are independent and have the same c.d.f., we say that
they are independent and identically distributed (i.i.d.)
Independence, convolutions and moment generating
functions
Proposition If X
1
, X
2
are independent and have densities p
1
(x), p
2
(x)
then X
1
+ X
2
has density
(p
1
p
2
)(x) =
R
p
1
(x y) p
2
(y)dy =
R
p
2
(x y) p
1
(y)dy
The moment generating function satises
M(s) = E[e
s(X
1
+X
2
)
] = E[e
sX
1
] E[e
s X
2
] = M
1
(s) M
2
(s)

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Stochastic Calculus I

Emile Borel. French mathematician; Minister of Marine; member of

-norms and spaces

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