Book Draft

1
Introduction to Stochastic Calculus

B V Rao and R L Karandikar
Chennai Mathematical Institute

bvrao@cmi.ac.in and rlk@cmi.ac.in
Version dated 30 May 2017.
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About this book:
The book could be described as Stochastic Integration without tears or fear or even as
Stochastic Integration made easy.
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This book can be used as a 2 semester graduate level course on Stochastic Calculus.
The background required is a course on measure theoretic probability.
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The book begins with conditional expectation and martingales and basic results on
martingales are included with proofs (in discrete time as well as in continuous time). Then
a chapter on Brownian motion and Ito integration w.r.t. Brownian motion follows, which
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includes stochastic di↵erential equations. These three chapters over 80 pages give a soft
landing to a reader to the more complex results that follow. The first three chapters form
the Introductory material.
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Taking a cue from the Ito integral, a Stochastic Integrator is defined and its properties
as well as the properties of the integral are defined at one go. In most treatments, we
start by defining the integral for a square integrable martingales and where integrands
themselves are in suitable Hilbert space. Then over several stages the integral is extended,
and at each step one has to reaffirm its properties. Here this is avoided. Just using the
definition, various results including quadratic variation, Ito formula, Emery topology are
defined and studied.
We then define quadratic variation of a square integrable martingale and using this show
that these are stochastic integrators. Using an inequality by Burkholder, we show that all
martingales and local martingales are stochastic integrators and thus semimartingales are
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stochastic integrators. We then show that stochastic integrators are semimartingales and
obtain various results such as a description of the class of integrands for the stochastic
integral. We complete the chapter by giving a proof of the Bichteler-Dellacherie-Meyer-
Mokobodzky Theorem.
These two chapters (of about 100 pages) form the basic material. Most results used in
these two chapter are known, but we have put them in a order to make the presentation
easy flowing. We have avoided invoking results from functional analysis but rather included
the required steps. Thus instead of saying that the integral is a continuous linear functional
on a dense subset of a Banach space and hence can be extended to the Banach space, we
explicitly construct the extension!
Next we introduce Pathwise formulae for the stochastic integral. These as yet have not
found a place in any textbook on stochastic integration. We briefly specialise to continuous
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semimartingales and obtain growth estimates and study solution of a stochastic di↵erential
equation (SDE) using the technique of random time change. We also prove a pathwise
formulae for the solution of an SDE driven by continuous semimartingales.
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Then we move onto a study of predictable increasing process and introduce predictable
stopping times etc and prove the Doob Meyer decomposition theorem
We conclude by proving the Metivier Pellaumail inequality and using it introduce a
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notion of dominating process of a semimartingale. We then obtain existence, uniqueness of
solutions to an SDE driven by a general semimartingale and also obtain a pathwise formula
by showing that modified Eular-Peano approximations converge almost surely.
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Contents
1 Discrete Parameter Martingales 7

1.1 Notations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
1.2 Conditional Expectation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
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1.3 Independence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
1.4 Filtration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
1.5 Martingales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
1.6 Stop Times . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
1.7
1.8
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Doob’s Maximal Inequality . . . . . . . . . . . . . . . . . . . . . . . . . . .
Martingale Convergence Theorem . . . . . . . . . . . . . . . . . . . . . . . .
20
22
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1.9 Square Integrable Martingales . . . . . . . . . . . . . . . . . . . . . . . . . . 29
1.10 Burkholder-Davis-Gundy inequality . . . . . . . . . . . . . . . . . . . . . . . 34
2 Continuous Time Processes 40

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2.1 Notations and Basic Facts . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40

2.2 Filtration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
2.3 Martingales and Stop Times . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
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2.4 A Version of Monotone Class Theorem . . . . . . . . . . . . . . . . . . . . . 59

2.5 The UCP Metric . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
2.6 The Lebesgue-Stieltjes Integral . . . . . . . . . . . . . . . . . . . . . . . . . 66
3 The Ito Integral 69

3.1 Quadratic Variation of Brownian Motion . . . . . . . . . . . . . . . . . . . . 69
3.2 Levy’s Characterization of the Brownian motion . . . . . . . . . . . . . . . 71
3.3 The Ito Integral . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
3.4 Multidimensional Ito Integral . . . . . . . . . . . . . . . . . . . . . . . . . . 81
3.5 Stochastic Di↵erential Equations . . . . . . . . . . . . . . . . . . . . . . . . 85
3
4 CONTENTS
4 Stochastic Integration 91
4.1 The Predictable -Field . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91
4.2 Stochastic Integrators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95
4.3 Properties of the Stochastic Integral . . . . . . . . . . . . . . . . . . . . . . 101
4.4 Locally Bounded Processes . . . . . . . . . . . . . . . . . . . . . . . . . . . 109
4.5 Approximation by Riemann Sums . . . . . . . . . . . . . . . . . . . . . . . 115
4.6 Quadratic Variation of Stochastic Integrators . . . . . . . . . . . . . . . . . 119
4.7 Quadratic Variation of the Stochastic Integral . . . . . . . . . . . . . . . . . 126
4.8 Ito’s Formula . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 130
4.9 The Emery Topology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 145
4.10 Extension Theorem . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 154
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5 Semimartingales 159
5.1 Notations and terminology . . . . . . . . . . . . . . . . . . . . . . . . . . . . 159
5.2 The Quadratic Variation Map . . . . . . . . . . . . . . . . . . . . . . . . . . 162
5.3
5.4
5.5
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Quadratic Variation of a Square Integrable Martingale . . . . . . . . . . . . 165
Square Integrable Martingales are Stochastic Integrators . . . . . . . . . . . 173
Semimartingales are Stochastic Integrators . . . . . . . . . . . . . . . . . . . 177
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5.6 Stochastic Integrators are Semimartingales . . . . . . . . . . . . . . . . . . . 180
5.7 The Class L(X) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 195
5.8 The Bichteler-Dellacherie-Meyer-Mokobodzky Theorem . . . . . . . . . . . 198
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5.9 Enlargement of Filtration . . . . . . . . . . . . . . . . . . . . . . . . . . . . 206
6 Pathwise Formula for the Stochastic Integral 210

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6.1 Preliminaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 210

6.2 Pathwise Formula for the Stochastic Integral . . . . . . . . . . . . . . . . . 211
6.3 Pathwise Formula for Quadratic Variation . . . . . . . . . . . . . . . . . . . 214
7 Continuous Semimartingales 216

7.1 Random Time Change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 216
7.2 Growth estimate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 221
7.4 Pathwise Formula for solution of SDE . . . . . . . . . . . . . . . . . . . . . 236
7.5 Matrix-valued Semimartingales . . . . . . . . . . . . . . . . . . . . . . . . . 238
CONTENTS 5
8 Predictable Increasing Processes 242

8.1 The -field F⌧ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 242
8.2 Predictable Stop Times . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 245
8.3 Natural FV Processes are Predictable . . . . . . . . . . . . . . . . . . . . . 258
8.4 Decomposition of Semimartingales revisited . . . . . . . . . . . . . . . . . . 265
8.5 Doob-Meyer Decomposition . . . . . . . . . . . . . . . . . . . . . . . . . . . 273
8.6 Square Integrable Martingales . . . . . . . . . . . . . . . . . . . . . . . . . . 279
9 The Davis Inequality 291

9.1 Preliminaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 291
9.2 Burkholder-Davis-Gundy inequality - Continuous Time . . . . . . . . . . . . 293
9.3 On Stochastic Integral w.r.t. a Martingale . . . . . . . . . . . . . . . . . . . 299
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9.4 Sigma-Martingales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 302
9.5 Auxiliary Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 305
10 Integral Representation of Martingales 308

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10.1 Preliminaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 308
10.2 One Dimensional Case . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 310
10.3 Quasi-elliptical multidimensional Semimartingales . . . . . . . . . . . . . . 317
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10.4 Continuous Multidimensional Semimartingales . . . . . . . . . . . . . . . . 322
10.5 General Multidimensional case . . . . . . . . . . . . . . . . . . . . . . . . . 326
10.6 Integral Representation w.r.t. Sigma-Martingales . . . . . . . . . . . . . . . 339
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10.7 Connections to Mathematical Finance . . . . . . . . . . . . . . . . . . . . . 342
11 Dominating Process of a Semimartingale 347

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11.1 An optimization result . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 348

11.2 Metivier-Pellaumail inequality . . . . . . . . . . . . . . . . . . . . . . . . . . 351
11.3 Growth Estimate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 352
11.4 Alternate metric for Emery topology . . . . . . . . . . . . . . . . . . . . . . 359
12 SDE driven by r.c.l.l. Semimartingales 367

12.1 Gronwall Type Inequality . . . . . . . . . . . . . . . . . . . . . . . . . . . . 367
12.3 Pathwise Formula for solution to an SDE . . . . . . . . . . . . . . . . . . . 377
12.4 Euler-Peano approximations . . . . . . . . . . . . . . . . . . . . . . . . . . . 381
6 CONTENTS
12.5 Matrix-valued Semimartingales . . . . . . . . . . . . . . . . . . . . . . . . . 389
13 Girsanov Theorem 393

13.1 Girsanov Theorem . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 393
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Chapter 1
Discrete Parameter Martingales
In this chapter, we will discuss martingales indexed by integers (mostly positive integers)
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and obtain basic inequalities on martingales and other results which are the basis of most of
the developments in later chapters on stochastic integration. We will begin with a discus-
sion on conditional expectation and then on filtration two notions central to martingales.
1.1 Notations
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For an integer d 1, Rd denotes the d-dimensional Euclidean space and B(Rd ) will denote
the Borel -field on Rd . Further, C(Rd ) and Cb (Rd ) will denote the classes of continuous
functions and bounded continuous functions on Rd respectively. When d = 1, we will write
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R in place of R1 .
(⌦, F, P) will denote a generic probability space and B(⌦, F) will denote the class of
real-valued bounded F-measurable functions.
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For a collection A ✓ F, (A) will denote the smallest -field which contains A and
for a collection G ✓ B(⌦, F), (G) will likewise denote the smallest -field with respect to
which each function in G is measurable.
It is well known and easy to prove that
(Cb (Rd )) = B(Rd ).
An Rd -valued random variable X (on a probability space (⌦, F, P)) is a measurable

function from (⌦, F) to (Rd , B(Rd )). For such an X and a function f 2 Cb (Rd ), E[f (X)]
(or EP [f (X)] if there are more than one probability measure under consideration) will
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8 Chapter 1. Discrete Parameter Martingales
denote the integral Z

E[f (X)] = f (X(!))dP(!).
⌦
For any measure µ on (⌦, A) and for 1  p < 1, we will denote by Lp (µ) the space
Lp (⌦, A, µ) of real-valued A measurable functions equipped with the norm
Z
1
kf kp = ( |f |p dµ) p .
It is well known that Lp (µ) is a Banach space under the norm kf kp .

For more details and discussions as well as proofs of statements quoted in this chapter,
see Billingsley [4], Breiman [5], Ethier and Kurtz[18].
1.2 Conditional Expectation
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Let X and Y be random variables. Suppose we are going to observe Y and are required to
make a guess for the value of X. Of course, we would like to be as close to X as possible.
Suppose the penalty function is square of the error. Thus we wish to minimize
E[(X F a)2 ] (1.2.1)
where a is the guess or the estimate. For this to be meaningful, we should assume E[X 2 ] <
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1. The value of a that minimizes (1.2.1) is the mean µ = E[X]. On the other hand, if we
are allowed to use observations Y while making the guess, then our estimate could be a
function of Y . Thus we should choose the function g such that
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E[(X g(Y ))2 ]
takes the minimum possible value. It can be shown that there exists a function g (Borel
measurable function from R to R) such that
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E[(X g(Y ))2 ]  E[(X f (Y ))2 ] (1.2.2)
for all (Borel measurable) functions f . Further, if g1 , g2 are two functions satisfying (1.2.2),
then g1 (Y ) = g2 (Y ) almost surely P. Indeed, A = L2 (⌦, F, P) - the space of all square
integrable random variables on (⌦, F, P) with inner product hX, Y i = E[XY ] giving rise
p
to the norm kZk = E[Z 2 ] is a Hilbert space and
K = {f (Y ) : f from R to R measurable, E[(f (Y ))2 ] < 1}
is a closed subspace of A. Hence given X 2 A, there is a unique element in K, namely

the orthogonal projection of X to K, that satisfies (1.2.2). Thus for X 2 A, we can define
1.2. Conditional Expectation 9
g(Y ) to be the conditional expectation of X given Y , written as E[X | Y ] = g(Y ). One

can show that for X, Z 2 A and a, b 2 R
E[aX + bZ | Y ] = aE[X | Y ] + bE[Z | Y ]
and
X  Z implies E[X | Y ]  E[Z | Y ].
Note that (1.2.2) implies that for all t

E[(X g(Y ))2 ]  E[(X g(Y ) + tf (Y ))2 ]
for any f (Y ) 2 K and hence that
t2 E[f (Y )2 ] + 2tE[(X g(Y ))f (Y )] 0, 8t.
In particular, g(Y ) satisfies
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E[(X g(Y ))f (Y )] = 0 8f bounded measurable. (1.2.3)
Indeed, (1.2.3) characterizes g(Y ). Also, (1.2.3) is meaningful even when X is not square
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integrable but only E[|X| ] < 1. With a little work we can show that given X with
E[|X| ] < 1, there exists a unique g(Y ) such that (1.2.3) is valid. To see this, suffices to
consider X 0, and then taking Xn = min(X, n), gn such that E[Xn | Y ] = gn (Y ), it
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follows that gn (Y )  gn+1 (Y ) a.s. and hence defining g̃(x) = lim sup gn (x), g(x) = g̃(x) if
g̃(x) < 1 and g(x) = 0 otherwise, one can show that
E[(X g(Y ))f (Y )] = 0 8f bounded measurable.
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It is easy to see that in (1.2.3) it suffices to take f to be {0, 1}-valued, i.e. indicator function
of a Borel set. We are thus led to the following definition: For random variables X, Y with
E[|X| ] < 1,
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E[X | Y ] = g(Y )
where g is a Borel function satisfying

E[(X g(Y ))1B (Y )] = 0, 8B 2 B(R). (1.2.4)
Now if instead of one random variable Y , we were to observe Y1 , . . . , Ym , we can similarly
define
E[X | Y1 , . . . Ym ] = g(Y1 , . . . Ym )
where g satisfies
E[(X g(Y1 , . . . Ym ))1B (Y1 , . . . Ym )] = 0, 8B 2 B(Rm ).
Also if we were to observe an infinite sequence, we have to proceed similarly, with g being
a Borel function on R1 . Of course, the random variables could be taking values in Rd .
In each case we will have to write down properties and proofs thereof and keep doing the
same as the class of observable random variables changes.
Instead, here is a unified way. Let (⌦, F, P) be a probability space and Y be a random
variable on ⌦. The smallest -field (Y ) with respect to which Y is measurable (also called
the -field generated by Y ) is given by
(Y ) = {A 2 F : A = {Y 2 B}, B 2 B(R)}.
A random variable Z can be written as Z = g(Y ) for a measurable function g if and only
if Z is measurable with respect to (Y ). Likewise, for random variables Y1 , . . . Ym , the
-field (Y1 , . . . Ym ) generated by Y1 , . . . Ym is the smallest -field with respect to which
Y1 , . . . Ym are measurable and is given by
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(Y1 , . . . Ym ) = {A 2 F : A = {(Y1 , . . . Ym ) 2 B}, B 2 B(Rm )}.
Similar statement is true even for an infinite sequence of random variables. In view of
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these observations, one can define conditional expectation given a -field as follows. It
should be remembered that one mostly uses it when the -field in question is generated by
a collection of observable random variables.
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Definition 1.1. Let X be a random variable on (⌦, F, P) with E[|X| ] < 1 and let G be
a sub- -field of F. Then the conditional expectation of X given G is defined to be the G
measurable random variable Z such that
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E[X 1A ] = E[Z 1A ], 8A 2 G. (1.2.5)
Existence of Z can be proven on the same lines as given above, first for the case when
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X is square integrable and then for general X. Also, Z is uniquely determined up to null
sets if Z and Z 0 are G measurable and both satisfy (1.2.5), then P(Z = Z 0 ) = 1. Some
properties of conditional expectation are given in the following two propositions.
Throughout the book, we adopt a convention that all statements involving random vari-
ables are to be interpreted in almost sure sense- i.e. X = Y means X = Y a.s., X  Y
means X  Y a.s. and so on.
Proposition 1.2. Let X, Z be integrable random variables on (⌦, F, P) and G, H be sub-

-fields of F with G ✓ H and a, b 2 R. Then we have
(i) E[aX + bZ | G] = aE[X | G] + bE[Z | G].

1.3. Independence 11
(ii) X  Z ) E[X | G]  E[Z | G].
(iii) |E[X | G]|  E[|X| | G].
(iv) E[E[X | G]] = E[X].
(v) E[E[X | H] | G] = E[X | G].
(vi) If Z is G measurable such that E[ |ZX| ] < 1 then

E[ZX | G] = ZE[X | G].
Of course when X is square integrable, we do have an analogue of (1.2.2):
Proposition 1.3. Let X be a random variable with E[X 2 ] < 1 and H be a sub -field.
Then for all H measurable square integrable random variables U
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E[(X E[X | H])2 ]  E[(X U )2 ].
1.3 Independence
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Two events A, B in a probability space (⌦, F, P), i.e. A, B 2 F are said to be independent
if
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P(A \ B) = P(A)P(B).
For j = 1, 2, . . . m, let Xj be an Rd -valued random variable on a probability space (⌦, F, P).
Then X1 , X2 , . . . Xm are said to be independent if for all Aj 2 B(Rd ), 1  j  m
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m
Y
P(Xj 2 Aj , 1  j  m) = P(Xj 2 Aj ).
j=1
A sequence {Xn } of random variables is said to be a sequence of independent random

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variables if X1 , X2 , . . . , Xm are independent for every m 1.

Let G be a sub -field of F. An Rd -valued random variable X is said to be independent
of the - field G if for all A 2 B(Rd ), D 2 G,
P({X 2 A} \ D) = P({X 2 A})P(D).
Exercise 1.4. Let X, Y be real valued random variables. Show that
(i) X, Y are independent if and only if for all bounded Borel measurable functions f, g on R,
one has
E[f (X)g(Y )] = E[f (X)]E[g(Y )]. (1.3.1)
(ii) X, Y are independent if and only if for all bounded Borel measurable functions f, on R,
one has
E[f (X) | (Y )] = E[f (X)]. (1.3.2)
(iii) X, Y are independent if and only if for all t 2 R, one has
E[exp{itX} | (Y )] = E[exp{itX}]. (1.3.3)
Exercise 1.5. Let U be an Rd -valued random variable and let G be a -field. Show that U
is independent of G if and only if for all 2 Rd
E[exp{i · U } | G] = E[exp{i · U }]. (1.3.4)
1.4 Filtration
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Suppose Xn denotes a signal being transmitted at time n over a noisy channel (such as
voice over telephone lines) and let Nn denote the noise at time n and Yn denote the noise
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corrupted signal that is observed. Under the assumption of additive noise, we get
Yn = Xn + Nn , n 0.
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Now the interest typically is in estimating the signal Xn at time n. Since the noise as well
the true signal are not observed, we must require that the estimate X̂n of the signal at
time n be a function of only observations upto time n, i.e. X̂n must only be a function of
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{Yk : 0  k  n}, or X̂n is measurable with respect to the -field Gn = {Yk : 0  k  n}.
A sequence of random variables X = {Xn } will also be referred to as a process. Usually, the
index n is interpreted as time. This is the framework for filtering theory. See Kallianpur
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[30] for more on filtering theory.

Consider a situation from finance. Let Sn be the market price of shares of a company
UVW at time n. Let An denote the value of the assets of the company, Bn denote the value
of contracts that the company has bid, Cn denote the value of contracts that the company
is about to sign. The process S is observed by the public but the processes A, B, C are not
observed by the public at large. Hence, while making a decision on investing in shares of the
company UVW, on the nth day, an investor can only use information {Sk : 0  k < n} (we
assume that the investment decision is to be made before the price on nth day is revealed).
Indeed, in trying to find an optimal investment policy ⇡ = (⇡n ) (optimum under some
criterion), the class of all investment strategies must be taken as all processes ⇡ such that
1.4. Filtration 13
for each n, ⇡n is a (measurable) function of {Sk : 0  k < n}. In particular, the strategy
cannot be a function of the unobserved processes A, B, C.
Thus it is useful to define for n 0, Gn to be the -field generated by all the random
variables observable before time n namely, S0 , S1 , S2 , . . . , Sn 1 and then require any action
to be taken at time n (say investment decision) should be measurable with respect to Gn .
These observations lead to the following definitions
Definition 1.6. A filtration on a probability space (⌦, F, P) is an increasing family of sub

-fields (F⇧ ) = {Fn : n 0} of F indexed by n 2 {0, 1, 2, . . . , m, . . .}.
Definition 1.7. A stochastic process X i.e. a sequence X={Xn } of random variables is said
to be adapted to a filtration (F⇧ ) if for all n 0, Xn is Fn measurable.
We will assume that the underlying probability is complete i.e. N 2 F, P(N ) = 0 and
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N1 ✓ N implies N1 2 F and that F0 contains all sets N 2 F with P(N ) = 0. We will
refer to a stochastic process as a process. Let N be the class of all null sets (sets with
P(N ) = 0), and for a process Z, possibly vector-valued, let
and
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FnZ = (Zk : 0  k  n)
FenZ = (N [ FnZ ).
(1.4.1)
(1.4.2)
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While it is not required in the definition, in most situations, the filtration (F⇧ ) under
consideration would be chosen to be (for a suitable process Z)
(F⇧Z ) = {FnZ : n 0}
R
or
(Fe⇧Z ) = {FenZ : n 0}.
D
Sometimes, a filtration is treated as a mere technicality. We would like to stress that

it is not so. It is a technical concept, but a very important ingredient of the analysis. For
example, in the estimation problem, one could consider the filtration (Fe⇧X,N ) (recall, X is
signal, N is noise and Y = X + N is the observable) as well as (F⇧Y ). While one can use
(Fe⇧X,N ) for technical reasons say in a proof, but when it comes to estimating the signal, the
estimate at time n has to be measurable with respect to FenY . If X̂n represents the estimate
of the signal at time n, then the process X̂ must be required to be adapted to (Fe⇧Y ).
Requiring it to be adapted to (Fe⇧X,N ) is not meaningful. Indeed, if we can take X̂n to be
adapted to (Fe⇧X,N ), then we can as well take X̂n = Xn which is of course not meaningful.
Thus, here (Fe⇧X,N ) is a mere technicality while (Fe⇧Y ) is more than a technicality.
1.5 Martingales
In this section, we will fix a probability space (⌦, F, P) and a filtration (F⇧ ). We will only
be considering R-valued processes in this section.
Definition 1.8. A sequence M = {Mn } of random variables is said to be a martingale if

M is (F⇧ ) adapted and for n 0 one has E[|Mn | ] < 1 and
EP [Mn+1 | Fn ] = Mn .
Definition 1.9. A sequence M = {Mn } of random variables is said to be a submartingale

if M is (F⇧ ) adapted and for n 0 one has E[|Mn | ] < 1 and
EP [Mn+1 | Fn ] Mn .
When there are more than one filtration in consideration, we will call it a (F⇧ )-martingale
T
or martingale w.r.t. (F⇧ ). Alternatively, we will say that {(Mn , Fn ) : n 1} is a martingale.
It is easy to see that for a martingale M , for any m < n, one has
F
EP [Mn | Fm ] = Mm
and similar statement is also true for submartingales. Indeed, one can define martingales
and submartingales indexed by an arbitrary partially ordered set. We do not discuss these
A
in this book.
If M is a martingale and is a convex function on R, then Jensen’s inequality implies
that the process X = {Xn } defined by Xn = (Mn ) is a submartingale if Xn is integrable
R
for all n. If M is a submartingale and is an increasing convex function then X is also

a submartingale provided Xn is integrable for each n. In particular, if M is a martingale
or a positive submartingale with E[Mn2 ] < 1 for all n, then Y defined by Yn = Mn2 is a
D
submartingale.
When we are having only one filtration under consideration, we will drop reference to
it and simply say M is a martingale. It is easy to see also that sum of two martingales with
respect to the same underlying filtration is also a martingale. We note here an important
property of martingales that would be used later.
Theorem 1.10. Let M m be a sequence of martingales on some probability space (⌦, F, P)

w.r.t. a fixed filtration (F⇧ ). Suppose that
Mnm ! Mn in L1 (P), 8n 0.
Then M is also a martingale w.r.t. the filtration (F⇧ ).
1.5. Martingales 15
Proof. Note that for any X m converging to X in L1 (P), for any -field G, using (i), (ii),
(iii) and (iv) in Proposition 1.2, one has
E[|E[X m | G] E[X | G]| ] = E[|E[(X m X) | G]| ]

m
 E[E[|X X| | G]]
= E[|X m X| ]
! 0.
For n 0, applying this to X m = Mnm , one gets
Mnm = E[Mn+1
m
| Fn ] ! E[Mn+1 | Fn ] in L1 (P).
But Mnm ! Mn in L1 (P) so that E[Mn+1 | Fn ] = Mn . It follows that M is a martingale.
The following decomposition result, called the Doob decomposition, is simple to prove
T
but its analogue in continuous time was the beginning of the theory of stochastic integra-
tion.
An =
Xn
F
Theorem 1.11. Let X be a submartingale. Let A = {An } be defined by A0 = 0 and for
n 1,
E[(Xk Xk 1 ) | Fk 1 ].
A
k=1
Then A is an increasing process (i.e. An  An+1 for n 0 ) such that A0 = 0, An is Fn 1

measurable for each n and M = {Mn } defined by
R
Mn = X n An
is a martingale. Further, if B = {Bn } is a process such that B0 = 0, Bn is Fn 1 measurable

D
for each n and N = {Nn } defined by Nn = Xn Bn is a martingale, then
P(An = Bn 8n 1) = 1.
Proof. Since X is a submartingale, each summand in the definition of An is non-negative

and hence A is an increasing process. Clearly, An is Fn 1 measurable. By the definition
of An , Mn we can see that
Mn Mn 1 = Xn Xn 1 E[Xn Xn 1 | Fn 1 ]
and hence that

E[Mn Mn 1 | Fn 1 ] =0
showing that M is a martingale. If Bn is as in the statement we can see that for n 1,

E[(Xn Xn 1 ) | Fn 1 ] = E[(Nn Nn 1 ) | Fn 1 ] + E[(Bn Bn 1 ) | Fn 1 ]
= E[(Bn Bn 1 ) | Fn 1 ]
= Bn Bn 1.
Now B0 = 0 implies
n
X
Bn = E[(Xk Xk 1) | Fk 1]
k=1
completing the proof.
The uniqueness in the result above depends strongly on the assumption that Bn is Fn 1
measurable. The process A is called the compensator of the submartingale X.
Let M = {Mn } be a martingale. The sequence D defined by Dn = Mn Mn 1 , for
T
n 1 and D0 = M0 is called a martingale di↵erence sequence and satisfies
E[Dn | Fn 1] = 0 8n 1. (1.5.1)
F
Definition 1.12. A sequence of random variables U = {Un } is said to be a predictable if for
all n 1, Un is Fn 1 measurable and U0 is F0 measurable.
The compensator A appearing in the Doob decomposition of a submartingale M is

A
predictable.
Consider a gambling house, where a sequence of games are being played, at say one
hour interval. If an amount a is bet on the nth game, the reward on the nth game is aDn .
R
Since a gambler can use the outcomes of the games that have been played earlier, Un
the amount she bets on nth game can be random instead of a fixed number but has to be
predictable with respect to the underlying filtration since the gambler has to decide how
D
much to bet before the nth game is played. If the game is fair, i.e. E[Dn | Fn 1 ] = 0, then
the partial sums Mn = D0 + . . . + Dn is a martingale and the total reward Rn at time n
P
is then given by Rn = nk=0 Uk Dk . One can see that it is also a martingale, if say Un is
bounded. This leads to the following definition.
Definition 1.13. Let M = {Mn } be a martingale and U = {Un } be a predictable sequence

of random variables. The process Z = {Zn } defined by Z0 = 0 and for n 1
n
X
Zn = Uk (Mk Mk 1) (1.5.2)
k=1
is called the martingale transform of M by the sequence U .
1.5. Martingales 17
The following result gives conditions under which the transformed sequence is a mar-
tingale.
Theorem 1.14. Suppose M = {Mn } is a martingale and U = {Un } is a predictable

sequence of random variables such that
E[|Mn Un | ] < 1 for all n 1. (1.5.3)
Then the martingale transform Z defined by (1.5.2) is a martingale.
Proof. Let us note that
E[|Mn Un | ] = E[E[|Mn Un | | Fn 1 ]]
E[|E[Mn Un | Fn 1 ]| ]
(1.5.4)
T
= E[|Un E[Mn | Fn 1 ]| ]
= E[|Un Mn 1| ]
where we have used properties of conditional expectation and the fact that Un is Fn 1
F
measurable and that M is a martingale. Thus, (1.5.3) implies E[|Un Mn 1 | ] < 1. This is
needed to justify splitting the expression in the next step.
A
E[Un (Mn Mn 1 ) | Fn 1 ] = E[Un Mn | Fn 1] E[Un Mn 1 | Fn 1 ]
= Un E[Mn | Fn 1] U n Mn 1
(1.5.5)
= U n Mn 1 U n Mn 1
R
= 0.
This implies Cn = Un (Mn Mn 1) is a martingale di↵erence sequence and thus Z defined
by (1.5.2) is a martingale.
D
The proof given above essentially also yields the following:
Theorem 1.15. Suppose M = {Mn } is a submartingale and U = {Un } is a predictable

sequence of random variables such that Un 0 and
E[|Mn Un | ] < 1 for all n 1. (1.5.6)
Then the transform Z defined by (1.5.2) is a submartingale.
Exercise 1.16. Let (Mn , Fn ) be a martingale. Show that M is a (F·M ) martingale.

1.6 Stop Times

We continue to work with a fixed probability space (⌦, F, P) and a filtration (F⇧ ).
Definition 1.17. A stop time ⌧ is a function from ⌦ into {0, 1, 2, . . . , } [ {1} such that for
all n 0,
{⌧ = n} 2 Fn , 8n < 1.
Equivalently, ⌧ is a stop time if {⌧  n} 2 Fn for all n 1. stop times were introduced

in the context of Markov Chains by Doob. Martingales and stop times together are very
important tools in the theory of stochastic process in general and stochastic calculus in
particular.
T
Definition 1.18. Let ⌧ be a stop time and X be an adapted process. The stopped random
variable X⌧ is defined by
X1
X⌧ (!) = Xn (!)1{⌧ =n} .
n=0
F
Note that by definition, X⌧ = X⌧ 1{⌧ <1} . The following results connecting martingales
and submartingales and stop times (and their counterparts in continuous time) play a very
A
important role in the theory of stochastic processes.
Exercise 1.19. Let and ⌧ be two stop times and let

R
⇠=⌧_ and ⌘ = ⌧ ^ .
Show that ⇠ and ⌘ are also stop times. Here and in the rest of this book, a _ b = max(a, b)
D
and a ^ b = min(a, b).
Exercise 1.20. Let ⌧ be a random variable taking values in {0, 1, 2, . . .} and for n 0 let
Fn = (⌧ ^ n). If ⌘ is a stop time for this filtration then show that ⌘ = (⌘ _ ⌧ ) ^ r for some
r 2 {0, 1, 2 . . . , 1}
Theorem 1.21. Let M = {Mn } be a submartingale and ⌧ be a stop time. Then the process
N = {Nn } defined by
Nn = Mn^⌧ ,
is a submartingale. Further, if M is a martingale then so is N .

1.6. Stop Times 19
Proof. Without loss of generality, we assume that M0 = 0. Let Un = 1{⌧ <n} and Vn =
1{⌧ n} . Since
{Un = 1} = [nk=01 {⌧ = k}
it follows that Un is Fn 1 measurable and hence U is a predictable sequence and since

Un + Vn = 1, it follows that V is also a predictable sequence. Noting that N0 = 0 and for
n 1
Xn
Nn = Vk (Mk Mk 1 )
k=1
the result follows from Theorem 1.14.
The following version of this result is also useful.
Theorem 1.22. Let M = {Mn } be a submartingale and , ⌧ be stop times such that  ⌧.
T
Let R = {Rn }, S = {Sn } be defined as follows: R0 = S0 = 0 and for n 1
S n = Mn Mn^⌧ ,
Rn = Mn^⌧
F Mn^ .
Then R, S are submartingales. Further, if M is a martingale then so are S, R.
Proof. To proceed as earlier, let Un = 1{⌧ <n} , Vn = 1{ <n⌧ } = 1{⌧ 1{

A
n} n} . Once
again U, V are predictable and note that S0 = R0 = 0 and for n 1
n
X
Sn = Uk (Mk Mk 1)
R
k=1
Xn
Rn = Vk (Mk Mk 1 ).
k=1
D
The result follows from Theorems 1.14.
The N in Theorem 1.21 is the submartingale M stopped at ⌧ . S in Theorem 1.22 is

the increment of M after ⌧ .
Corollary 1.23. Let M = {Mn } be a submartingale and , ⌧ be stop times such that
 ⌧ . Then for all n 1
E[Mn^ ]  E[Mn^⌧ ].
It is easy to see that for a martingale M , E[Mn ] = E[M0 ] for all n 1. Of course, this
property does not characterize martingales. However, we do have the following result.
Theorem 1.24. Let M = {Mn } be an adapted process such that E[|Mn | ] < 1 for all
n 0. Then M is a martingale if and only if for all bounded stop times ⌧ ,
E[M⌧ ] = E[M0 ]. (1.6.1)
Proof. If M is a martingale, Theorem 1.21 implies that
E[M⌧ ^n ] = E[M0 ].
Thus taking n such that ⌧  n, it follows that (1.6.1) holds.

Conversely, suppose (1.6.1) is true. To show that M is a martingale, suffices to show
that for n 0, A 2 Fn ,
E[Mn+1 1A ] = E[Mn 1A ]. (1.6.2)
Let ⌧ be defined by ⌧ = (n + 1)1A + n1Ac . Since A 2 Fn , it is easy to check that ⌧ is a
T
stop time. Using E[M⌧ ] = E[M0 ], it follows that
E[Mn+1 1A + Mn 1Ac ] = E[M0 ]. (1.6.3)
F
Likewise, using the (1.6.1) for ⌧ = n, we get E[Mn ] = E[M0 ], or equivalently
E[Mn 1A + Mn 1Ac ] = E[M0 ].
Now (1.6.2) follows from (1.6.3) and (1.6.4) completing the proof.
(1.6.4)
A
1.7 Doob’s Maximal Inequality
R
We will now derive an inequality for martingales known as Doob’s maximal inequality. It
plays a major role in stochastic calculus as we will see later.
D
Theorem 1.25. Let M be a martingale or a positive submartingale. Then, for > 0,

n 1 one has
1
P( max |Mk | > )  E[|Mn |1{max0kn |Mk |> } ]. (1.7.1)
0kn
Further, for 1 < p < 1, there exists a universal constant Cp depending only on p such that
E[( max |Mk |)p ]  Cp E[|Mn |p ]. (1.7.2)

0kn
Proof. Under the assumptions, the process N defined by Nk = |Mk | is a positive sub-
martingale. Let
⌧ = inf{k : Nk > }.
1.7. Doob’s Maximal Inequality 21
Here, and in what follows, we take infimum of the empty set as 1. Then ⌧ is a stop time
and further, {max0kn Nk  } ✓ {⌧ > n}. By Theorem 1.22, the process S defined by
Sk = Nk Nk^⌧ is a submartingale. Clearly S0 = 0 and hence E[Sn ] 0. Note that ⌧ n
implies Sn = 0. Thus, Sn = Sn 1{max0kn Nk > } . Hence
E[Sn 1{max0kn Nk > } ] 0.
This yields
E[N⌧ ^n 1{max0kn Nk > } ]  E[Nn 1{max0kn Nk > } ]. (1.7.3)
Noting that max0kn Nk > implies ⌧  n and N⌧ > , it follows that
T
N⌧ ^n 1{max0kn Nk > } 1{max0kn Nk > } , (1.7.4)
F
combining (1.7.3) and (1.7.4) we conclude that (1.7.1) is valid.
The conclusion (1.7.2) follows from (1.7.1). To see this, fix 0 < ↵ < 1 and let us write
A
f = (max0kn |Mk |) ^ ↵ and g = |Mn |. Then the inequality (1.7.1) can be rewritten as
1
P(f > )  E[g 1{f > } ]. (1.7.5)
R
Now consider the product space (⌦, F, P) ⌦ ((0, ↵], B((0, ↵]), µ) where µ is the Lebesgue
measure on (0, ↵]. Consider the function h : ⌦ ⇥ (0, ↵] 7! (0, 1) defined by
D
h(!, t) = ptp 1
1{t<f (!)} , (!, t) 2 ⌦ ⇥ (0, ↵].
First, note that

Z Z Z
[ h(!, t)dt]dP(!) = [f (!)]p dP(!)
⌦ (0,↵] ⌦ (1.7.6)
p
= E[f ].
On the other hand, using Fubini’s theorem in the first and fourth step below and using the
estimate (1.7.5) in the second step, we get

Z Z Z Z
[ h(!, t)dt]dP(!) = [ h(!, t)dP(!)]dt
⌦ (0,↵] (0,↵] ⌦
Z
= pt(p 1) P(f > t)dt
(0,↵]
Z
1
 pt(p 1) E[g 1{f >t} ]dt
(0,↵] t
Z Z
(p 2) (1.7.7)
= pt [ g(!)1{f (!)>t} dP(!)]dt
(0,↵] ⌦
Z Z
= [ pt(p 2) 1{f (!)>t} dt]g(!)dP(!)
⌦ (0,↵]
Z
p
= g(!)f (p 1) (!)dP(!)
(p 1) ⌦
T
p
= E[gf (p 1) ].
(p 1)
The first step in (1.7.8) below follows from the relations (1.7.6)-(1.7.7) and the next one
E[f p ] 
(p
p
p
1)
F
from Holder’s inequality, where q = (p p 1) so that p1 + 1q = 1:
E[gf (p 1)
]
A
1 1
= (E[g p ]) p (E[f (p 1)q
]) q (1.7.8)
(p 1)
p 1 1
= (E[g p ]) p (E[f p ]) q .
(p 1)
R
Since f is bounded, (1.7.8) implies

(1 1
) p 1
E[f p ] q  (E[g p ]) p
(p 1)
D
which in turn implies (recalling definitions of f, g), writing Cp = ( (p p 1) )p
E[(( max |Mk |) ^ ↵)p ]  Cp E[|Mn |p ]. (1.7.9)

0kn
Since (1.7.9) holds for all ↵, taking limit as ↵ " 1 (via integers) and using monotone
convergence theorem, we get that (1.7.2) is true.
1.8 Martingale Convergence Theorem

Martingale convergence theorem is one of the key results on martingales. We begin this
section with an upcrossings inequality - a key step in its proof. Let {an : 1  n  m} be
1.8. Martingale Convergence Theorem 23
a sequence of real numbers and ↵ < be real numbers. Let sk , tk be defined (inductively)
as follows: s0 = 0, t0 = 0, and for k = 1, 2, . . . m
sk = inf{n tk 1 : an  ↵}, tk = inf{n sk : an }.
Recall our convention- infimum of an empty set is taken to be 1. It is easy to see that if
tk = j < 1, then
0  s1 < t1 < . . . < sk < tk = j < 1 (1.8.1)
and for i  j
asi  ↵, ati . (1.8.2)
We define
Um ({aj : 1  j  m}, ↵, ) = max{k : tk  m}.
Um ({aj : 1  j  m}, ↵, ) is the number of upcrossings of the interval (↵, ) by the
T
sequence {aj : 1  j  m}. The equations (1.8.1) and (1.8.2) together also imply
tk > (2k 1) and also writing cj = max(↵, aj ) that
m
X
j=1
(ctj ^m csj ^m )
F
( ↵)Um ({aj }, ↵, ).
This inequality follows because each completed upcrossings contributes at least

(1.8.3)
↵ to
A
the sum, one term could be non-negative and rest of the terms are zero.
Lemma 1.26. For a sequence {an : n 1} of real numbers,

R
lim inf an = lim sup an (1.8.4)

n!1 n!1
if and only if
lim Um ({aj : 1  j  m}, ↵, ) < 1, 8↵ < , ↵, rationals. (1.8.5)

D
m!1
Proof. If lim inf n!1 an < ↵ < < lim supn!1 an then
lim Um ({aj : 1  j  m}, ↵, ) = 1.

m!1
Thus (1.8.5) implies (1.8.4). The other implication follows easily.
It follows that if (1.8.5) holds, then limn!1 an exists in R̄ = R [ { 1, 1}. The next
result gives an estimate on expected value of
Um ({Xj : 1  j  m}, ↵, )
for a submartingale X.
Theorem 1.27. (Doob’s upcrossings inequality). Let X be a submartingale. Then

for ↵ <
E[|Xm | + |↵| ]
E[Um ({Xj : 1  j  m}, ↵, )]  . (1.8.6)
↵
Proof. Fix ↵ < and define 0 = 0 = ⌧0 and for k 1
k = {n ⌧k 1 : Xn  ↵}, ⌧k = {n k : Xn }.
Then for each k, k and ⌧k are stop times. Writing Yk = (Xk ↵)+ , we see that Y is also
submartingale and as noted in (1.8.3)
m
X
(Y⌧j ^m Y j ^m ) ( ↵)Um ({Xj : 1  j  m}, ↵, ). (1.8.7)
j=1
On the other hand, using 0  ( 1 ^ m)  (⌧1 ^ m)  . . .  ( m ^ m)  (⌧m ^ m) = m we
T
have
Xm m
X1
Ym Y 1 ^m = (Y⌧j ^m Y j ^m ) + (Y j+1 ^m Y⌧j ^m ). (1.8.8)
j=1 j=1
Since
have
j+1 ^m
E[Y j+1 ^m
F
⌧j ^ m are stop times and Y is a submartingale, using Corollary 1.23 we
Y⌧j ^m ] 0. (1.8.9)
A
Putting together (1.8.7), (1.8.8) and (1.8.9) we get
E[Ym Y 1 ^m ] E[( ↵)Um ({Xj : 1  j  m}, ↵, )]. (1.8.10)

R
Since Yk 0 we get
E[Ym ]
E[Um ({Xj : 1  j  m}, ↵, )]  . (1.8.11)
↵
↵)+  |Xm | + |↵|.
D
The inequality (1.8.6) now follows using Ym = (Xm
We recall the notion of uniform integrability of a class of random variables and related
results.
A collection {Z↵ : ↵ 2 } of random variables is said to be uniformly integrable if
lim [sup E[|Z↵ |1{|Z↵ | K} ]] = 0. (1.8.12)

K!1 ↵2
Here are some exercises on Uniform Integrability.
Exercise 1.28. If {Xn : n 1} is uniformly integrable and |Yn |  |Xn | for each n then
show that {Yn : n 1} is also uniformly integrable.
Exercise 1.29. Let {Z↵ : ↵ 2 } be such that for some p > 1

sup E[|Z↵ |p ] < 1.
↵
show that {Z↵ : ↵ 2 } is Uniformly integrable.
Exercise 1.30. Let {Z↵ : ↵ 2 } be Uniformly integrable. Show that
(i) sup↵ E[|Z↵ | ] < 1.
(ii) 8✏ > 0 9 > 0 such that P(A) < implies

E[1A |Z↵ | ] < ✏ (1.8.13)
Hint: For (ii), use E[1A |Z↵ | ]  K + E[|Z↵ |1{|Z↵ | K} ].
Exercise 1.31. Show that {Z↵ : ↵ 2 } satisfies (i), (ii) in Exercise 1.30 if and only if
{Z↵ : ↵ 2 } is uniformly integrable.
T
Exercise 1.32. Suppose {X↵ : ↵ 2 } and {Y↵ : ↵ 2 } are uniformly integrable and for
each ↵ 2 , let Z↵ = X↵ + Y↵ . Show that {Z↵ : ↵ 2 } is also uniformly integrable.
Lemma 1.33. Let Z, Zn 2 L1 (P) for n 1.

F
The following result on uniform integrability is standard.
(i) Zn converges in L1 (P) to Z if and only if it converges to Z in probability and {Zn }

A
is uniformly integrable.
(ii) Let {G↵ : ↵ 2 } be a collection of sub -fields of F. Then

R
{E[Z | G↵ ] : ↵ 2 } is uniformly integrable.
Exercise 1.34. Prove Lemma 1.33. For (i), use Exercise 1.31.
We are now in a position to prove the basic martingale convergence theorem.
D
Theorem 1.35. (Martingale Convergence Theorem) Let {Xn : n 0} be a sub-

martingale such that
sup E[|Xn | ] = K1 < 1. (1.8.14)
n
Then the sequence of random variables Xn converges a.e. to a random variable ⇠ with
E[|⇠| ] < 1. Further if {Xn } is uniformly integrable, then Xn converges to ⇠ in L1 (P). If
{Xn } is a martingale or a positive submartingale and if for 1 < p < 1
sup E[|Xn |p ] = Kp < 1, (1.8.15)
n
then Xn converges to ⇠ in Lp (P).
Proof. The upcrossings inequality, Theorem 1.27 gives

K1 + |↵|
E[Um ({Xj }, ↵, )] 
↵
for any ↵ < and hence by monotone convergence theorem
E[sup Um ({Xj }, ↵, )] < 1.
m 1
Let N↵ = {supm 1 Um ({Xj }, ↵, ) = 1}. Then P(N↵ ) = 0 and hence if

N ⇤ = [{N↵ : ↵ < , ↵, rationals}
then P(N ⇤ ) = 0. Clearly, for ! 62 N ⇤ one has
sup Um ({Xj (!)}, ↵, ) < 1 8↵ < , ↵, rationals.
m 1
Hence by Lemma 1.26, for ! 62 N ⇤
T
⇠ ⇤ (!) = lim inf Xn (!) = lim sup Xn (!).
n!1 n!1
Defining ⇠ ⇤ (!) = 0 for ! 2 N ⇤, by Fatou’s lemma we get
F
E[|⇠ ⇤ | ] < 1
so that P(⇠ ⇤ 2 R) = 1. Then defining ⇠(!) = ⇠ ⇤ (!)1{|⇠⇤ (!)|<1} we get
Xn ! ⇠ a.e.
A
If {Xn } is uniformly integrable, the a.e. convergence also implies L1 (P) convergence.
If {Xn } is a martingale or a positive submartingale, then by Doob’s maximal inequality,
R
E[( max |Xk |)p ]  Cp E[|Xn |p ]  Cp Kp < 1

1kn
and hence by monotone convergence theorem Z = (supk 1 |Xk |)p is integrable. Now the
convergence in Lp (P) follows from the dominated convergence theorem.
D
Theorem 1.36. Let {Fm } be an increasing family of sub -fields of F and let F1 =
([1
m=1 Fm ). Let Z 2 L (P) and for 1  n < 1, let
1
Zn = E[Z | Fn ].
Then Zn ! Z ⇤ = E[Z | F1 ] in L1 (P) and a.s..
Proof. From the definition it is clear that Z is a martingale and it is uniformly integrable
by Lemma 1.33. Thus Zn converges in L1 (P) and a.s. to say Z ⇤ . To complete the proof,
we will show that
Z ⇤ = E[Z | F1 ]. (1.8.16)
Since each Zn is F1 measurable and Z ⇤ is limit of {Zn } (a.s.), it follows that Z ⇤ is F1

measurable. Fix m 1 and A 2 Fm . Then
E[Zn 1A ] = E[Z 1A ], 8n m (1.8.17)
since Fm ✓ Fn for n m. Taking limit in (1.8.17) and using that Zn ! Z ⇤ in L1 (P), we

conclude that 8A 2 [1
n=1 Fn
E[Z ⇤ 1A ] = E[Z 1A ]. (1.8.18)
Since [1n=1 Fn is a field that generates the -field F1 , the monotone class theorem implies
that (1.8.18) holds for all A 2 F1 and hence (1.8.16) holds.
The previous result has an analogue when the -fields are decreasing. Usually one
introduces a reverse martingale (martingale indexed by negative integers) to prove this
T
result. We avoid it by incorporating the same in the proof.
Theorem 1.37. Let {Gm } be a decreasing family of sub -fields of F, i.e. Gm ◆ Gm+1 for
all m 1. Let G1 = \1
m=1 Gm . Let Z 2 L (P) and for 1  n  1, let
1
Then Zn ! Z ⇤ in L1 (P) and a.s..

F
Zn = E[Z | Gn ].
A
Proof. Fix m. Then {(Zm j , Fm j) : 1  j  m} is a martingale and the upcrossings
inequality Theorem 1.27 gives
R
E[|Z0 | + |↵| ]
E[Um ({Zm j : 1  j  m}, ↵, )]  .
↵
and hence proceeding as in Theorem 1.35, we can conclude that there exists N ⇤ ✓ ⌦ with
P(N ⇤ ) = 0 and for ! 62 N ⇤ one has
D
sup Um ({Zm j (!)}, ↵, ) < 1 8↵ < , ↵, rationals.

m 1
Now arguments as in Lemma 1.7.1 imply that
lim inf Zn (!) = lim sup Zn (!).

n!1 n!1
By Jensen’s inequality |Zn |  E[|Z0 | | Gn ]. It follows that {Zn } is uniformly integrable (by
Lemma 1.33) and thus Zn converge a.e. and in L1 (P) to a real-valued random variable Z ⇤ .
Since Zn for n m is Gm measurable, it follows that Z ⇤ is Gm -measurable for every m and
hence Z ⇤ is G1 -measurable.
Also for all A 2 G1 , for all n 1 we have

Z Z
Zn 1A dP = Z0 1A dP
since G1 ✓ Gn . Now L1 (P) convergence of Zn to Z ⇤ implies that for all A 2 G1

Z Z
⇤
Z 1A dP = Z0 1A dP.
Thus E[Z0 | G1 ] = Z ⇤ .
Exercise 1.38. Let ⌦ = [0, 1], F be the Borel -field on [0, 1] and let P denote the Lebesgue
measure on (⌦, F). Let Q be another probability measure on (⌦, F) absolutely continuous
with respect to P, i.e. satisfying : P(A) = 0 implies Q(A) = 0. For n 1 let
2 n
X
n
X (!) = 2n Q((2 n
(j 1), 2 n
j])1(2 (!).
T
n (j 1),2 n j]
j=1
Let Fn be the field generated by the intervals {(2 n (j 1), 2 n j] : 1  j  2n }. Show that
(Xn , Fn ) is a uniformly integrable martingale and thus converges to a random variable ⇠ in
L1 (P). Show that ⇠ satisfies Z
A
F
⇠ dP = Q(A) 8A 2 F. (1.8.19)
A
Hint: To show uniform integrability of {Xn : n 1} use Exercise 1.31 along with the fact that
absolute continuity of Q w.r.t. P implies that for all ✏ > 0, 9 > 0 such that P(A) < implies
Q(A) < ✏.
R
Exercise 1.39. Let F be a countably generated -field on a set ⌦, i.e. there exists a
sequence of sets {Bn : n 1} such that F = ({Bn : n 1}). Let P, Q be probability
measures on (⌦, F) such that Q absolutely continuous with respect to P. For n 1, let
D
Fn = ({Bk : k  n}). Then show that
(i) For each n 1, 9 a partition {C1 , C2 . . . , Ckn } of ⌦ such that
Fn = (C1 , C2 . . . , Ckn ).
(ii) For n 1 let

kn
X
n Q(Cj )
X (!) = 1{P(Cj )>0} 1C (!). (1.8.20)
P(Cj ) j
j=1
Show that (X n , Fn ) is a uniformly integrable martingale on (⌦, F, P).

1.9. Square Integrable Martingales 29
(iii) X n converges in L1 (P) and also P almost surely to X satisfying

Z
X dP = Q(A) 8A 2 F. (1.8.21)
A
The random variable X in (1.8.19) and (1.8.20) is called the Radon-Nikodym derivative
of Q w.r.t. P.
Exercise 1.40. Let F be a countably generated -field on a set ⌦. Let be a non-empty

set, A be a -field on . For each 2 let P and Q be probability measures on (⌦, F) such
that Q is absolutely continuous with respect to P . Suppose that for each A 2 F, 7! P (A)
and 7! Q (A) are measurable. Show that there exists ⇠ : ⌦ ⇥ 7! [0, 1) such that ⇠ is
measurable w.r.t F ⌦ A and
Z
⇠(·, )dP = Q (A) 8A 2 F, 8 2 (1.8.22)
T
A
1.9 Square Integrable Martingales

Martingales M such that
F
E[|Mn |2 ] < 1, n 0
are called square integrable martingales and they play a special role in the theory of stochas-
(1.9.1)
A
tic integration as we will see later. Let us note that for p = 2, the constant Cp appearing
in (1.7.2) equals 4. Thus for a square integrable martingale M , we have
E[( max |Mk |)2 ]  4E[|Mn |2 ]. (1.9.2)

R
0kn
As seen earlier, Xn = Mn2 is a submartingale and the compensator of X- namely the

predictable increasing process A such that Xn An is a martingale is given by A0 = 0 and
D
for n 1,
Xn
An = E[(Xk Xk 1 ) | Fk 1 ].
k=1
The compensator A is denoted as hM, M i. Using

2
E[(Mk Mk 1) | Fk 1] = E[(Mk2 2Mk Mk 1 + Mk2 1 ) | Fk 1]
(1.9.3)
= E[(Mk2 Mk2 1 ) | Fk 1]
it follows that the compensator can be described as

n
X
2
hM, M in = E[(Mk Mk 1) | Fk 1] (1.9.4)
k=1
Thus hM, M i is the unique predictable increasing process with hM, M i0 = 0 such that
Mn2 hM, M in is a martingale. Let us also define another increasing process [M, M ]
associated with a martingale M : [M, M ]0 = 0 and
n
X
2
[M, M ]n = (Mk Mk 1) . (1.9.5)
k=1
The process [M, M ] is called the quadratic variation of M and the process hM, M i is called
the predictable quadratic variation of M . It can be easily checked that
n
X
Mn2 [M, M ]n = 2 Mk 1 (Mk Mk 1)
k=1
and hence using Theorem 1.14 it follows that Mn2 [M, M ]n is also a martingale. If M0 = 0,
then it follows that
T
E[Mn2 ] = E[hM, M in ] = E[[M, M ]n ]. (1.9.6)
We have already seen that if U is a bounded predictable sequence then the transform
Z defined by (1.5.2)
Zn =
Xn
Uk (Mk Mk 1 )
k=1
F
A
is itself a martingale. The next result includes an estimate on the L2 (P) norm of Zn .
Theorem 1.41. Let M be a square integrable martingale and U be a bounded predictable

R
process. Let Z0 = 0 and for n 1, let

n
X
Zn = Uk (Mk Mk 1 ).
k=1
D
Then Z is itself a square integrable martingale and further

n
X
hZ, Zin = Uk2 (hM, M ik hM, M ik 1) (1.9.7)
k=1
n
X
[Z, Z]n = Uk2 ([M, M ]k [M, M ]k 1 ). (1.9.8)
k=1
As a consequence
n
X N
X
2
E[ max | Uk (Mk Mk 1 )| ]  4E[ Uk2 ([M, M ]k [M, M ]k 1 )]. (1.9.9)
1nN
k=1 k=1
Proof. Since U is bounded and predictable Zn is square integrable for each n. That Z is
square integrable martingale follows from Theorem 1.14. Since
2
(Zk Zk 1) = Uk2 (Mk Mk 1)
2
(1.9.10)
the relation (1.9.8) follows from the definition of the quadratic variation. Further, taking
conditional expectation given Fk 1 in (1.9.10) and using that Uk is Fk 1 measurable, one
concludes
2
E[(Zk Zk 1) | Fk 1] = Uk2 E[(Mk Mk 1)
2
| Fk 1]
= Uk2 E[(Mk2 2Mk Mk 1 + Mk2 1 ) | Fk 1]

(1.9.11)
= Uk2 E[(Mk2 Mk2 1 ) | Fk 1 ]
= Uk2 (hM, M ik hM, M ik 1)
and this proves (1.9.7). Now (1.9.9) follows from (1.9.8) and the Doob’s maximal inequality,
T
Theorem 1.25.
Corollary 1.42. For a square integrable martingale M and a predictable process U

P
bounded by 1, defining Zn = nk=1 Uk (Mk Mk 1 ) we have
E[ max |
1nN
n
X
k=1
Uk (Mk
F
Mk 1 )|
2
]  4E[ [M, M ]N ]. (1.9.12)
A
Further,
[Z, Z]n  [M, M ]n , n 1. (1.9.13)
The inequality (1.9.12) plays a very important role in the theory of stochastic integra-
R
tion as later chapters will reveal. We will obtain another estimate due to Burkholder [6]
on martingale transform which is valid even when the martingale is not square integrable.
Theorem 1.43. (Burkholder’s inequality) Let M be a martingale and U be a bounded

D
predictable process, bounded by 1. Then

n
X 9
P( max | Uk (Mk Mk 1 )| )  E[|MN | ]. (1.9.14)
1nN
k=1
Proof. Let
⌧ = inf{n : 0  n  N, |Mn | } ^ (N + 1)
4
so that ⌧ is a stop time. Since {⌧  N } = {max0nN |Mn | 4 }, using Doob’s maximal
inequality (Theorem 1.25) for the positive submartingale {|Mk | : 0  k  N }, we have
4
P(⌧  N )  E(|MN |). (1.9.15)
For 0  n  N let ⇠n = Mn 1{n<⌧ } . By definition of ⌧ , |⇠n |  4 for 0  n  N . Since on

the set {⌧ = N + 1}, ⇠n = Mn , 8n  N , it follows that
n
X
P( max | Uk (Mk Mk 1 )| )
1nN
k=1
n
X
 P( max | Uk (⇠k ⇠k 1 )| ) + P(⌧  N ) (1.9.16)
1nN
k=1
n
X 4
 P( max | Uk (⇠k ⇠k 1 )| )+ E(|MN |).
1nN
k=1
We will now prove that for any predictable sequence of random variables {Vn } bounded
by 1, we have
N
X
|E[ Vk (⇠k ⇠k 1 )]|  E[|MN | ]. (1.9.17)
T
k=1
PN
Let us define M̃k = Mk^⌧ for k 0. Since M̃ is a martingale, E[ k=1 Vk (M̃k M̃k 1 )] = 0.
Writing Yn = ⇠n M̃n , it follows that
E[
N
X
k=1
Vk (⇠k ⇠k
F
1 )] = E[
N
X
k=1
Vk (Yk Yk 1 )]. (1.9.18)
A
Since Yn = Mn 1{n<⌧ } Mn^⌧ = Mn^⌧ 1{⌧ n} = M⌧ 1{⌧ n} , it follows that Yk Yk 1 =
M⌧ 1{⌧ (k 1)} M⌧ 1{⌧ k} and thus Yk Yk 1 = M⌧ 1{⌧ =k} . Using (1.9.18), we get
N
X N
X
|E[ Vk (⇠k ⇠k 1 )]| =|E[ Vk (Yk Yk 1 )]|
R
k=1 k=1
N
X
E[ |Yk Yk 1| ]
D
k=1
N
(1.9.19)
X
E[ |M⌧ |1{⌧ =k} ]
k=1
E[|M⌧ |1{⌧ N } ]
E[|MN | ]
where for the last step we have used that |Mn | is a submartingale. We will decompose
{⇠n : 0  n  N } into a martingale {Rn : 0  n  N } and a predictable process
{Bn : 0  n  N } as follows: B0 = 0, R0 = ⇠0 and for 0  n  N
Bn = Bn 1 + (E[⇠n | Fn 1] ⇠n 1)
Rn = ⇠ n Bn .
By construction, {Rn } is a martingale and {Bn } is predictable. Note that
Bn Bn 1 = E[⇠n | Fn 1] ⇠n 1
and hence
Rn Rn 1 = (⇠n ⇠n 1) E[⇠n ⇠n 1 | Fn 1 ].
As a consequence
2 2
E[(Rn Rn 1) ]  E[(⇠n ⇠n 1) ]. (1.9.20)
For x 2 R, let sgn(x) = 1 for x 0 and sgn(x) = 1 for x < 0, so that |x| =
T
sgn(x)x. Now taking Vk = sgn(Bk Bk 1 ) and noting that Vk is Gk 1 measurable, we have
E[Vk (Bk Bk 1 )] = E[Vk (⇠k ⇠k 1 )] (since ⇠ = R + B and R is a martingale) and hence
E[ max |
1nN
n
X
k=1
Uk (Bk Bk F
1 )| ]  E[
N
X
k=1
XN
|(Bk Bk 1 )| ]
A
= E[ Vk (Bk Bk 1 )]
k=1 (1.9.21)
XN
= E[ Vk (⇠k ⇠k 1 )]
R
k=1
 E[ |MN | ]
where we have used (1.9.19). Thus

D
n
X 2
P( max | Uk (Bk Bk 1 )| ) E[ |MN | ]. (1.9.22)
1nN 2
k=1
Pn
Since R is a martingale and U is predictable, Xn = k=1 Uk (Rk Rk 1) is a martingale
and hence Xn2 is a submartingale and hence
n
X n
X 2
2
P( max | Uk (Rk Rk 1 )| ) =P( max | Uk (Rk Rk 1 )| )
1nN 2 1nN 4
k=1 k=1 (1.9.23)
4 2
 2
E[XN ].
Since X is a martingale transform of the martingale R, with U bounded by one, we have

2
E[XN ] = E[[X, X]N ]
 E[[R, R]N ]
N
X
2 (1.9.24)
 E[ (Rk Rk 1) ]
k=1
N
X
2
 E[ (⇠k ⇠k 1) ],
k=1
where we have used (1.9.20). The estimates (1.9.23) and (1.9.24) together yield
Xn N
4 X
P( max | Uk (Rk Rk 1 )| )  2 E[ (⇠k ⇠k 1 )2 ]. (1.9.25)
1nN 2
k=1 k=1
Using the identity (y x)2 = y 2 x2 2x(y x) for y = ⇠k and x = ⇠k 1 and summing
T
over k, one gets
X N N
X
(⇠k ⇠k 1 )2 =⇠N
2
⇠02 2 ⇠k 1 (⇠k ⇠k 1)
k=1 k=1
where Wk = 4 ⇠k

4
F
|MN | + 2
4
N
X
k=1
Wk (⇠k ⇠k 1)
(1.9.26)
A
1. Note that |Wk |  1 and Wk is Gk 1 measurable. Using (1.9.19) and
(1.9.26), we get
N
X
2 3
E[ (⇠k ⇠k 1) ] E[|MN | ]. (1.9.27)
4
R
k=1
Now (1.9.25) and (1.9.27) together yield
X n
3
P( max | Uk (Rk Rk 1 )| ) E[|MN | ]. (1.9.28)
1nN 2
D
k=1
Since ⇠k = Rk + Bk , (1.9.22) and (1.9.28) give
n
X 5
P( max | Uk (⇠k ⇠k 1 )| ) E[|MN | ]. (1.9.29)
1nN
k=1
Finally, (1.9.16) and (1.9.29) together imply the required estimate (1.9.14).
1.10 Burkholder-Davis-Gundy inequality

If M is a square integrable martingale with M0 = 0, then we have
E[Mn2 ] = E[hM, M in ] = E[[M, M ]n ].
1.10. Burkholder-Davis-Gundy inequality 35
And Doob’s maximal inequality (1.9.2) yields
E[[M, M ]n ] = E[Mn2 ]
 E[( max |Mk |)2 ] (1.10.1)
1kn
 4E[[M, M ]n ].
Burkholder and Gundy proved that indeed for 1 < p < 1, there exist constants c1p , c2p such
that
p p
c1p E[([M, M ]n ) 2 ]  E[( max |Mk |)p ]  c2p E[([M, M ]n ) 2 ].
1kn
Note that fr p = 2, this reduces to (1.10.1). Davis went on to prove the above inequality
for p = 1. This case plays an important role in the result on integral representation of
T
martingales that we will later consider. Hence we include a proof for the case p = 1
essentially this is the proof given by Davis [14]
1
F
Theorem 1.44. Let M be a martingale with M0 = 0. Then there exist universal constants
c1 , c2 such that for all N 1
c1 E[([M, M ]N ) 2 ]  E[ max |Mk | ]  c2 E[([M, M ]N ) 2 ].

1
(1.10.2)
A
1kN
Proof. Let us define for n 1

R
Un1 = max |Mk |

1kn
Xn
1
Un2 = ( (Mk Mk 1)
2
)2
k=1
D
Wn = max |Mk Mk 1|
1kn
and Vn1 = Un2 , Vn2 = Un1 . The reason for unusual notation is that we will prove
E[Unt ]  130E[Vnt ], t = 1, 2 (1.10.3)
and this will prove both the inequalities in (1.10.2). Note that by definition, for all n 1,
Wn  2Vnt , Wn  2Unt t = 1, 2. (1.10.4)
We begin by decomposing M as Mn = Xn + Yn , where X and Y are also martingales

defined as follows. For n 1 let

Rn = (Mn Mn 1 )1{|(Mn Mn 1 )|>2Wn 1 }
Sn = E[Rn | Fn 1]
n
X
Xn = (Rk Sk )
k=1
Tn = (Mn Mn 1 )1{|(Mn Mn 1 )|2Wn 1 }
Y n = Mn Xn
and X0 = Y0 = 0. Let us note that X is a martingale by definition and hence so is Y . Also
that
Xn
Yn = (Tk + Sk ).
k=1
T
If |Rn | > 0 then |(Mn Mn 1 )| > 2Wn 1 and so Wn = |(Mn Mn 1 )| and in turn,
|Rn | = Wn < 2(Wn Wn 1 ). Thus (noting Wn Wn 1 for all n)
Xn
|Rk |  2Wn (1.10.5)
X n
k=1
and using that E[ |Sn | ]  E[ |Rn | ], it also follows that F
E[ |Sk | ]  2E(Wn ). (1.10.6)
A
k=1
Thus (using (1.10.4)) we have
Xn n
X
E[ |Rk | + |Sk | ]  4E(Wn )  8E[Vnt ], t = 1, 2. (1.10.7)
R
k=1 k=1
Since Xk Xk 1 = Rk Sk , (1.10.7) gives us for all n 1,
Xn
E[ |Xk Xk 1 | ]  8E[Vnt ], t = 1, 2.
D
(1.10.8)
k=1
Let us define for n 1,
A1n = max |Xk |
1kn
Xn
1
A2n = ( (Xk Xk 1)
2
)2
k=1
Fn1 = max |Yk |

1kn
Xn
1
Fn2 = ( (Yk Yk 1)
2
)2
k=1
Pn
and Bn1 = A2n , Bn2 = A1n , G1n = Fn2 , G2n = Fn1 . Since for 1  j  n, |Xj |  k=1 |Rk | +
Pn
k=1 |Sk |, the estimates (1.10.7) - (1.10.8) immediately gives us
E[Atn ]  8E[Vnt ], E[Bnt ]  8E[Vnt ], t = 1, 2. (1.10.9)
Also we note here that for all n 1, t = 1, 2
Unt  Atn + Fnt (1.10.10)
and
Gtn  Bnt + Vnt . (1.10.11)
Thus, for all n 1, t = 1, 2 using (1.10.9) we conclude
E[Unt ]  8E[Vnt ] + E[Fnt ]. (1.10.12)
T
Now using Fubini’s theorem (as used in proof of Theorem 1.25) it follows that
Z 1
t
E[Fn ] = P(Fnt > x)dx. (1.10.13)
0
F
We now will estimate P(FNt > x). For this we fix t 2 {1, 2} and for x 2 (0, 1), define a
stop time
A
x = inf{n 1 : Vnt > x or Gtn > x or |Sn+1 | > x} ^ N.
Since Sn+1 is Fn measurable, it follows that x is a stop time. If x < N then either
P
VNt > x or GtN > x or Nk=1 |Sn | > x. Thus
R
PN
P( x < N )  P(VNt > x) + P(GtN > x) + P( k=1 |Sk | > x)
and hence
Z Z Z
D
1 1 1
P( x < N )dx  P(VNt > x)dx + P(GtN > x)dx
0 0 0
Z 1
P
+ P( Nk=1 |Sn | > x)dx
0
PN
= E[VNt ] + t
E[GN ] + E[ k=1 |Sn | ]
 E[VNt ] + E[VNt ] + E[BN

t
] + 2E[WN ]
where we have used (1.10.11) and (1.10.6) in the last step. Now using (1.10.9), (1.10.4)
give us
Z 1
P( x < N )dx  14E[VNt ]. (1.10.14)
0
Note that S x  x and hence
|Gt x Gt x 1|  |T x + S x|
 2W x 1 +x
 4V tx 1 +x
 5x
and as a result, using Gt x 1  x, we conclude
Gt x  6x.
Hence in view of (1.10.11), we have
Gt x  min{BN
t
+ VNt , 6x}. (1.10.15)
T
Let Zn = Yn^ x . Then Z is a martingale with Z0 = 0 and
N
X
2 2
E[ZN ]= E[(Zk Zk 1) ] = E[(G1 x )2 ].
k=1
Further, Zn2 is a positive submartingale and hence

F
A
P(F 1x > x) = P( max |Zk | > x)
1kN
1 2
 2 E[ZN ]
x
R
1
= 2 E[(G1 x )2 ].
x
On the other hand
PN
D
P(F 2x > x) = P(( 2 ) 12

k=1 (Zk Zk 1) > x)
N
1 X 2
 2 E[(Zk Zk 1) ]
x
k=1
1
= E[(ZN )2 ]
x2
1
 2 E[(G2 x )2 ].
x
Thus, we have for t = 1, 2, for n 1
1
P(F tx > x)  E[(Gt x )2 ]. (1.10.16)
x2
Now, writing Qt = 16 (BNt + V t ), we have

N
Z 1
E[FNt ] = P(FNt > x)dx
Z0 1 Z 1
 P( x < N )dx + P(F tx > x)dx
0 0
Z 1
t 1
 14E[VN ] + E[(Gt x )2 ]dx
0 x2
Z 1
1
 14E[VNt ] + 2
E[(min{BN t
+ VNt , 6x})2 ]dx (1.10.17)
0 x
Z 1
t 36
 14E[VN ] + E[ 2
(min{Qt , x})2 dx]
0 x
Z Qt Z 1
36 2 36 t 2
 14E[VNt ] + E[ 2
(x) dx] + E[ 2
(Q ) ]dx
0 x Q t x
T
 14E[VNt ] + E[36Qt ] + E[36Qt ].
Using the estimate (1.10.9), we have
1
E[Qt ] = (E[BNt
] + E[VNt ])
6
9
 E[VNt ]
6
F (1.10.18)
A
and putting together (1.10.17)-(1.10.18) we conclude
E[FNt ]  122E[VNt ]
and along with (1.10.12) we finally conclude, for t = 1, 2

R
t
E[UN ]  130E[VNt ].
D
Chapter 2
Continuous Time Processes
In this chapter, we will give definitions, set up notations that will be used in the rest of the
T
book and give some basic results. While some proofs are included, several results are stated
without proof. The proofs of these results can be found in standard books on stochastic
processes.
2.1 Notations and Basic Facts

F
A
E will denote a complete separable metric space, C(E) will denote the space of real-valued
continuous functions on E and Cb (E) will denote bounded functions in C(E), B(E) will
denote the Borel -field on E. Rd will denote the d-dimensional Euclidean space and
R
L(m, d) will denote the space of m ⇥ d matrices. For x 2 Rd and A 2 L(m, d), |x| and kAk
will denote the Euclidean norms of x, A respectively.
(⌦, F, P) will denote a generic probability space and B(⌦, F) will denote the class of
D
real-valued bounded F-measurable functions, When ⌦ = E and F = B(E), we will write

B(E) for real-valued bounded Borel- measurable functions.
Recall that for a collection A ✓ F, (A) will denote the smallest -field which contains
A and for a collection G of measurable functions on (⌦, F), (G) will likewise denote the
smallest - field on ⌦ with respect to which each function in G is measurable.
It is well known and easy to prove that for a complete separable metric space E,
(Cb (E)) = B(E)
For an integer d 1, let Cd = C([0, 1), Rd ) with the ucc topology, i.e. uniform
convergence on compact subsets of [0, 1). With this topology, Cd is itself a complete
40
2.1. Notations and Basic Facts 41
separable metric space. We will denote a generic element in Cd by ⇣ and coordinate

mappings t on Cd by
t (⇣) = ⇣(t), ⇣ 2 Cd and 0  t < 1.

It can be shown that
B(Cd ) = ( t : 0  t < 1).
A function ↵ from [0, 1) to Rd is said to be r.c.l.l. (right continuous with left limits) if
↵ is right continuous everywhere (↵(t) = limu#t ↵(u) for all 0  t < 1) and such that the
left limit ↵(t ) = limu"t ↵(u) exists for all 0 < t < 1. We define ↵(0 ) = 0 and for t 0,
↵(t) = ↵(t) ↵(t ).
For an integer d 1, let Dd = D([0, 1), Rd ) be the space of all r.c.l.l. functions ↵ from
[0, 1) to Rd .
T
Exercise 2.1. Let ↵ 2 Dd .
(i) Show that for any ✏ > 0, and T < 1, the set
is a finite set.
F
{t 2 [0, T ] : |( ↵)(t)| > ✏}
A
(ii) Show that the set {t 2 [0, 1) : |( ↵)(t)| > 0} is a countable set.
(iii) Let K = {↵(t) : 0  t  T } [ {↵(t ) : 0  t  T }. Show that K is compact.
The coordinate mappings ✓t on Dd are defined by

R
✓t (↵) = ↵(t), ↵ 2 Dd and 0  t < 1.

The space Dd is equipped with the -field (✓t : 0  t < 1). It can be shown that this
D
-field is same as the Borel -field for the Skorokhod topology (see Ethier and Kurtz[18] ).
An E-valued random variable X defined on a probability space (⌦, F, P) is a measurable
function from (⌦, F) to (E, B(E)). For such an X and a function f 2 Cb (E), E[f (X)] will
denote the integral Z
E[f (X)] = f (X(!))dP(!).
⌦
If there are more than one probability measures under consideration, we will denote it as
EP [f (X)].
An E-valued stochastic process X is a collection {Xt : 0  t < 1} of E-valued random
variables. While one can consider families of random variables indexed by sets other than
42 Chapter 2. Continuous Time Processes
[0, 1), say [0, 1] or even [0, 1] ⇥ [0, 1], unless stated otherwise we will take the index set to
be [0, 1). Sometimes for notational clarity we will also use X(t) to denote Xt .
From now on unless otherwise stated, a process will mean a continuous time stochastic
process X = (Xt ) with t 2 [0, 1) or t 2 [0, T ]. For more details and discussions as well
as proofs of statements given without proof in this chapter, see Breiman [5], Ethier and
Kurtz[18], Ikeda and Watanabe[23] Jacod [25], Karatzas and Shreve [42], Metivier [48],
Meyer [49], Protter [50], Revuz-Yor [51], Stroock and Varadhan [57], Williams [56].
Definition 2.2. Two processes X, Y , defined on the same probability space (⌦, F, P) are
said to be equal (written as X = Y ) if
P(Xt = Yt for all t 0) = 1.
More precisely, X = Y if 9⌦0 2 F such that P(⌦0 ) = 1 and
T
8t 0, 8! 2 ⌦0 , Xt (!) = Yt (!).
v
Definition 2.3. A process Y is said to be a version of another process X (written as X !
F
Y ) if both are defined on the same probability space and if
P(Xt = Yt ) = 1 for all t 0.

A
v
It should be noted that in general, X ! Y does not imply X = Y . Take ⌦ = [0, 1]
with F to be the Borel field and P to be the Lebesgue measure. Let Xt (!) = 0 for all
t, ! 2 [0, 1]. For t, ! 2 [0, 1], Yt (!) = 0 for ! 2 [0, 1], ! 6= t and Yt (!) = 1 for ! = t. Easy
R
v
to see that X ! Y but P(Xt = Yt for all t 0) = 0.
Definition 2.4. Two E-valued processes X, Y are said to have same distribution (written
d
as X = Y ), where X is defined on (⌦1 , F1 , P1 ) and Y is defined on (⌦2 , F2 , P2 ), if for all
D
m 1, 0  t1 < t2 < . . . < tm , A1 , A2 , . . . , Am 2 B(E)

P1 (Xt1 2 A1 , Xt2 2 A2 , . . . , Xtm 2 Am )
= P2 (Yt1 2 A1 , Yt2 2 A2 , . . . , Ytm 2 Am ).
Thus, two processes have same distribution if their finite dimensional distributions are
v d
the same. It is easy to see that if X ! Y then X = Y .
Definition 2.5. Let X be an E-valued process and D be a Borel subset of E. X is said to

be D-valued if
P(Xt 2 D 8t) = 1.
2.1. Notations and Basic Facts 43
Definition 2.6. An E-valued process X is said to be a continuous process (or a process

with continuous paths) if for all ! 2 ⌦, the path t 7! Xt (!) is continuous.
Definition 2.7. An E-valued process X is said to be an r.c.l.l. process (or a process with
right continuous paths with left limits) if for all ! 2 ⌦, the path t 7! Xt (!) is right continuous
and admits left limits for all t > 0.
Definition 2.8. An E-valued process X is said to be an l.c.r.l. process (or a process with
left continuous paths with right limits) if for all ! 2 ⌦, the path t 7! Xt (!) is left continuous
on (0, 1) and admits right limits for all t 0.
For an r.c.l.l. process X, X will denote the r.c.l.l. process defined by Xt = X(t ),
i.e. the left limit at t, with the convention X(0 ) = 0 and let
T
X=X X
so that ( X)t = 0 at each continuity point and equals the jump otherwise. Note that by
the above convention
F
( X)0 = X0 .
v
Let X, Y be r.c.l.l. processes such that X ! Y . Then it is easy to see that X = Y .
A
The same is true if both X, Y are l.c.r.l. processes.
Exercise 2.9. Prove the statements in the previous paragraph.

R
It is easy to see that if X is an Rd -valued r.c.l.l. process or an l.c.r.l. process then
sup |Xt (!)| < 1 8T < 1, 8!.

0tT
When X is an Rd -valued continuous process, the mapping ! 7! X· (!) from ⌦ into Cd

D
is measurable and induces a measure P X 1 on (Cd , B(Cd )). This is so because the Borel
-field B(Cd ) is also the smallest -field with respect to which the coordinate process is
measurable. Likewise, when X is an r.c.l.l. process, the mapping ! 7! X· (!) from ⌦ into Dd
is measurable and induces a measure P X 1 on (Dd , B(Dd )). In both cases, the probability
measure P X 1 is called the distribution of the process X
Definition 2.10. A d-dimensional Brownian Motion (also called a Wiener process) is an

Rd -valued continuous process X such that
(i) P(X0 = 0) = 1.
(ii) For 0  s < t < 1, the distribution of Xt Xs is Normal (Gaussian) with mean 0 and
co-variance matrix (t s)I, i.e. for u 2 Rd
E[exp{iu · (Xt Xs )}] = exp{ (t s)|u|2 }
(iii) For m 1, 0 = t0 < t1 < . . . < tm , the random variables Y1 , . . . , Ym are independent,
where Yj = Xtj Xtj 1 .
Equivalently, it can be seen that a Rd -valued continuous process X is a Brownian motion

if and only if for m 1, 0  t1 < . . . < tm , u1 , u2 , . . . , um 2 Rd ,
m
X m
1 X
E[exp{i uj · Xtj }] = exp{ min(tj , tk )uj · uk }.
2
j=1 j,k=1
Remark 2.11. The process X in the definition above is sometimes called a standard Brownian
T
motion and Y given by
Yt = µt + Xt
where µ 2 Rd and is a positive constant, is also called a Brownian motion for any µ and .
F
When X is a d-dimensional Brownian motion, its distribution, i.e. the induced measure
µ = P X 1 on (Cd , B(Cd )) is known as the Wiener measure. The Wiener measure was
A
constructed by Wiener before Kolmogorov’s axiomatic formulation of Probability theory.
The existence of Brownian motion or the Wiener measure can be proved in many di↵erent
ways. One method is to use Kolmogorov’s consistency theorem to construct a process
X satisfying (i), (ii) and (iii) in the definition, which determine the finite dimensional
R
distributions of X and then to invoke the following criterion for existence of a continuous
v
process X̃ such that X ! X̃.
D
Theorem 2.12. Let X be an Rd -valued process. Suppose that for each T < 1, 9m >
0, K < 1 , > 0 such that
E[|Xt Xs |m ]  K|t s|1+ , 0  s  t  T.

v
Then there exists a continuous process X̃ such that X ! X̃.
Exercise 2.13. Let X be a Brownian motion and let Y be defined as follows: Y0 = 0 and
for 0 < t < 1, Yt = tXs where s = 1t . Show that Y is also a Brownian motion.
Definition 2.14. A Poisson Process (with rate parameter ) is an r.c.l.l. non-negative integer
valued process N such that
2.2. Filtration 45
(i) N0 = 0.
n
(ii) P(Nt Ns = n) = exp{ t} ( n!t) .
(iii) For m 1, 0 = t0 < t1 < . . . < tm , the random variables Y1 , . . . , Ym are independent,
where Yj = Ntj Ntj 1 .
Exercise 2.15. Let N 1 , N 2 be Poisson processes with rate parameters 1 and 2 respectively.
Suppose N 1 and N 2 are independent. Show that N defined by Nt = Nt1 + Nt2 is also a Poisson
process with rate parameter = 1 + 2 .
Brownian motion and Poisson process are the two most important examples of contin-
uous time stochastic processes and arise in modelling of phenomenon occurring in nature.
T
2.2 Filtration
As in the discrete time case, it is useful to define for t 0, Gt to be the - field generated
F
by all the random variables observable up to time t and then require any action to be taken
at time t (an estimate of some quantity or investment decision) should be measurable with
respect to Gt . These observations lead to the following definitions.
A
Definition 2.16. A filtration on a probability space (⌦, F, P) is an increasing family of sub
-fields (F⇧ ) = {Ft : t 0} of F indexed by t 2 [0, 1).
R
Definition 2.17. A process X is said to be adapted to a filtration (F⇧ ) if for all t 0, Xt

is Ft measurable.
We will always assume that the underlying probability space is complete i.e. N 2 F,
D
P(N ) = 0 and N1 ✓ N implies N 2 F and (ii) that F0 contains all sets N 2 F with
P(N ) = 0.
Note that if X is (F⇧ )-adapted and Y = X (see Definition 2.2) then Y is also (F⇧ )-
adapted in view of the assumption that F0 contains all null sets.
Given a filtration (F⇧ ), we will denote by (F⇧+ ) the filtration {Ft+ : t 0} where
Ft+ = \u>t Fu .
Let N be the class of all null sets (sets with P(N ) = 0), and for a process Z, possibly
vector-valued, let
FtZ = (N [ (Zu : 0  u  t)). (2.2.1)
Then (F⇧Z ) is the smallest filtration such that F0 contains all null sets with respect to
which Z is adapted.
While it is not required in the definition, in most situations, the filtration (F⇧ ) under
consideration would be chosen to be (for a suitable process Z)
(F⇧Z ) = {FtZ : t 0}
Sometimes, a filtration is treated as a mere technicality, specially in continuous time
setting as a necessary detail just to define stochastic integral. We would like to stress that
it is not so. See discussion in Section 1.4.
2.3 Martingales and Stop Times

Let M be a process defined on a probability space (⌦, F, P) and (F⇧ ) be a filtration.
T
Definition 2.18. M is said to be (F⇧ ) martingale if M is (F⇧ ) adapted, Mt is integrable
for all t and for 0  s < t one has
F
EP [Mt | Fs ] = Ms .
Definition 2.19. M is said to be (F⇧ ) submartingale if M is (F⇧ ) adapted, Mt is integrable

for all t and for 0  s < t one has
A
EP [Mt | Fs ] Ms .
When there is only one filtration under consideration, we will drop reference to it and
R
call M to be a martingale/ submartingale respectively. If M is a martingale and is

a convex function on R, then Jensen’s inequality implies that (M ) is a submartingale
provided each (Mt ) is integrable. In particular, if M is a martingale with E[Mt2 ] < 1
for all t then M 2 is a submartingale. We are going to be dealing with martingales that
D
have r.c.l.l. paths. The next result shows that under minimal conditions on the underlying
filtration one can assume that every martingale has r.c.l.l. paths.
Theorem 2.20. Suppose that the filtration (F⇧ ) satisfies

N0 ✓ N, N 2 F, P(N ) = 0 ) N0 2 F0 (2.3.1)
\t>s Ft = Fs 8s 0. (2.3.2)
Then every martingale M admits an r.c.l.l. version M̃ i.e. there exists an r.c.l.l. process
M̃ such that
P(Mt = M̃t ) = 1 8t 0. (2.3.3)
2.3. Martingales and Stop Times 47
Proof. For k, n 1, let snk = k2 n and Xkn = Msnk and Gkn = Fsnk . Then for fixed n,
{Xkn : k 0} is a martingale w.r.t. the filtration {Gkn : k 0}. Thus the Doob’s
upcrossings inequality Theorem 1.27 yields, for rationals ↵ < and an integer T , writing
T n = T 2n ,
E[|MT | ] + |↵|
E[UTn ({Xkn : 0  k  Tn }, ↵, )]  .
↵
Thus, using the observation that
UTn ({Xkn : 0  k  Tn }, ↵, )  UTn+1 ({Xkn+1 : 0  k  Tn+1 }, ↵, )
we get by the monotone convergence theorem,
E[|MT | ] + |↵|
E[sup UTn ({Xkn : 0  k  Tn }, ↵, )]  .
n 1 ↵
Thus we conclude that there exists a set N with P(N ) = 0 such that for ! 62 N ,
T
sup UTn ({Xkn : 0  k  Tn }, ↵, ) < 1 (2.3.4)
n 1
for all rationals ↵ < and integers T . Thus if {tk : k 1} are diadic rationals increasing
or decreasing to t, then for ! 62 N , Mtk (!) converges. Thus defining ✓k (t) = ([t2k ] + 1)2 k ,
F
where [r] is the largest integer less than or equal to r (the integer part of r), and for ! 62 N ,
M̃t (!) = lim M✓k (t) (!), 0  t < 1
k!1
(2.3.5)
A
it follows that t 7! M̃t (!) is a r.c.l.l. function and agrees with Mt (!) for diadic rationals t.
Let us define M̃t (!) = 0 for ! 2 N . Since F0 contains all P null sets, it follows that M̃ is
an r.c.l.l. adapted process and by definition
R
P(Mt = M̃t ) = 1 for diadic rationals t.

Fix t and let tn = ✓n (t). Then \n Ftn = Ft and M̃tn = Mtn converges to M̃t a.s. by
D
construction. Further,
Mtn = E[Mt+1 | Ftn ] ! E[Mt+1 | Ft ] = Mt a.s.
by Theorem 1.37. Hence (2.3.3) follows.
The conditions (2.3.1) and (2.3.2) together are known as usual Hypothesis in the lit-
erature. We will assume (2.3.1) but will not assume (2.3.2). We will mostly consider
martingales with r.c.l.l. paths, and refer to it as an r.c.l.l. martingale.
When we are having only one filtration under consideration, we will drop reference to
it and simply say M is a martingale. We note here an important property of martingales
that would be used later.
Theorem 2.21. Let M n be a sequence of martingales on some probability space (⌦, F, P)

w.r.t. a fixed filtration (F⇧ ). Suppose that
Mtn ! Mt in L1 (P), 8t 0.
Then M is also a martingale w.r.t. the filtration (F⇧ ).
Proof. Note that for any X n converging to X in L1 (P), for any -field G, using (i), (ii),
(iii) and (iv) in Proposition 1.2, one has
E[|E[X n | G] E[X | G]| ] = E[|E[(X n X) | G]| ]
 E[E[|X n X| | G]]
n
= E[|X X| ]
! 0.
T
For s < t, applying this to X n = Mtn , one gets
Msn = E[Mtn | Fs ] ! E[Mt | Fs ] in L1 (P).
Since Msn ! Ms in L1 (P), it follows that M is a martingale.

F
Remark 2.22. It may be noted that in view of our assumption that F0 contains all null sets,
M as in the statement of the previous theorem is adapted.
A
Here is a consequence of Theorem 1.35 in continuous time.
Theorem 2.23. Let M be a martingale such that {Mt : t 0} is uniformly integrable.

R
Then, there exists a random variable ⇠ such that Mt ! ⇠ in L (P).

1
Proof. Here {Mn : n 1} is a uniformly integrable martingale and Theorem 1.35 yields
that Mn ! ⇠ in L1 (P). Similarly, for any sequence tn " 1, Mtn converges to say ⌘ in
D
L1 (P). Interlacing argument gives ⌘ = ⇠ and hence Mt ! ⇠ in L1 (P).
The Doob’s maximal inequality for martingales in continuous time follows from the
discrete version easily.
Theorem 2.24. Let M be an r.c.l.l. process. If M is a martingale or a positive submartin-

gale then one has
(i) For > 0, 0 < t < 1

1
P[ sup |Ms | > ]  E[|Mt | ].
0st
(ii) For 0 < t < 1

E[ sup |Ms |2 ]  4E[|Mt |2 ].
0st
Example 2.25. Let (Wt ) denote a one dimensional Brownian motion on a probability space
(⌦, F, P). Then by the definition of Brownian motion, for 0  s  t, Wt Ws has mean zero
and is independent of {Wu , 0  u  s}. Hence (see (1.3.2)) we have
E[Wt Ws | FsW ] = 0
and hence W is an (F⇧W )-martingale. Likewise,
E[(Wt Ws )2 | FsW ] = E[(Wt Ws ) 2 ] = t s
and using this and the fact that (Wt ) is a martingale, it is easy to see that
E[Wt2 Ws2 | FsW ] = t s
T
and so defining Mt = Wt2 t, it follows that M is also an (F⇧W )-martingale.
Example 2.26. Let (Nt ) denote a Poisson process with rate parameter = 1 on a probability
F
space (⌦, F, P). Then by the definition of Poisson process, for 0  s  t, Nt Ns has mean
(t s) and is independent of {Nu , 0  u  s}. Writing Mt = Nt t, we can see using (1.3.2)
that
A
E[Mt Ms | FsN ] = 0
and hence M is an (F⇧N )-martingale. Likewise,
E[(Mt Ms )2 | FsM ] = E[(Mt Ms ) 2 ] = t s
R
and using this and the fact that (Mt ) is a martingale, it is easy to see that
E[Mt2 Ms2 | FsN ] = t s
D
and so defining Ut = Mt2 t, it follows that U is also an (F⇧N )-martingale.
The notion of stop time, as mentioned in Section 1.6, was first introduced in the context
of Markov chains. Martingales and stop times together are very important tools in the
theory of stochastic process in general and stochastic calculus in particular.
Definition 2.27. A stop time with respect to a filtration (F⇧ ) is a mapping ⌧ from ⌦ into
[0, 1] such that for all t < 1,
{⌧  t} 2 Ft .
If the filtration under consideration is fixed, we will only refer to it as a stop time. Of
course, for a stop time, {⌧ < t} = [n {⌧  t n1 } 2 Ft . For stop times ⌧ and , it is easy
to see that ⌧ ^ and ⌧ _ are stop times. In particular, ⌧ ^ t and ⌧ _ t are stop times.
Example 2.28. Let X be a Rd -valued process with continuous paths adapted to a filtration
(F⇧ ) and let C be a closed set in R. Then
⌧C = inf{t 0 : Xt 2 C} (2.3.6)
is a stop time. To see this, define open sets Uk = {x : d(x, C) < k1 }. Writing Ar,k = {Xr 2
Uk } and Qt = {r : r rational, 0  r  t},
{⌧C  t} = \1
k=1 [[r2Qt Ar,k ]. (2.3.7)
⌧C is called the hitting time of C.
T
If X is an r.c.l.l. process, then the hitting time ⌧C may not be a random variable and
hence may not be a stop time. Let us define the contact time C by
C = min{inf{t 0 : Xt 2 C}, inf{t > 0 : Xt 2 C}}. (2.3.8)

With same notations as above, we now have
{ C  t} = [\1
F
k=1 ([r2Qt Ar,k )] [ {Xt 2 C} (2.3.9)
A
and thus C is a stop time. If 0 62 C, then C can also be described as
C = inf{t 0 : Xt 2 C or Xt 2 C}.
Exercise 2.29. Construct an example to show that this alternate description may be incorrect
R
when 0 2 C.
If ⌧ is a [0, 1)-valued stop time, then for integers m 1, ⌧ m defined via

D
⌧m = 2 m
([2m ⌧ ] + 1) (2.3.10)
is also a stop time since {⌧ m  t} = {⌧ m  2 m ([2m t])} = {⌧ < 2 m ([2m t])} and it follows
that {⌧ m  t} 2 (F⇧ ). Clearly, ⌧ m # ⌧ .
One can see that if k is an increasing sequence of stop times ( k  k+1 for all k 1),
then = limk"1 k is also a stop time. However, if k # , may not be a stop time as
seen in the next exercise.
Exercise 2.30. Let ⌦ = { 1, 1} and P be such that 0 < P(1) < 1. Let Xt (1) = Xt ( 1) = 0
for 0  t  1. For t > 1, let Xt (1) = sin(t 1) and Xt ( 1) = sin(t 1). Let
k
k = inf{t 0 : Xt 2 },
= inf{t 0 : Xt > 0}.
Show that FtX = { , ⌦} for 0  t  1 and FtX = { , {1}, { 1}, ⌦} for t > 1, k are stop
times w.r.t. (F·X ) and k # but is not a stop time w.r.t. (F·X ). Note that { < s} 2 FsX
for all s and yet is not a stop time.
Exercise 2.31. Let ⌧ be a [0, 1)-valued random variable and Ft = (⌧ ^ t). Show that if
⌘ is a stopping time for this filtration then ⌘ = (⌘ _ ⌧ ) ^ r for some r 2 [0, 1].
Definition 2.32. For a stochastic process X and a stop time ⌧ , X⌧ is defined via
X⌧ (!) = X⌧ (!) (!)1{⌧ (!)<1} .
Remark 2.33. A random variable ⌧ taking countably many values {sj }, 0  sj < 1 8j is
a stop time if and only if {⌧ = sj } 2 Fsj for all j. For such a stop time ⌧ and a stochastic
T
process X,
X1
X⌧ = 1{⌧ =sj } Xsj
j=1
F
and thus X⌧ is a random variable (i.e. a measurable function).
In general, X⌧ may not be a random variable, i.e. may not be a measurable function.
A
However, if X has right continuous paths X⌧ is a random variable. To see this, given ⌧
that is [0, 1)-valued, X⌧ m is measurable where ⌧ m is defined via (2.3.10) and X⌧ m ! X⌧
and hence X⌧ is a random variable. Finally, for a general stop time ⌧ , ⇠n = X⌧ ^n is a
R
random variable and hence

X⌧ = (lim sup ⇠n )1{⌧ <1}
n!1
is also a random variable.
D
Lemma 2.34. Let Z be an r.c.l.l. adapted process and ⌧ be a stop time with ⌧ < 1. Let
Ut = Z⌧ ^t and Vt = Z⌧ 1[⌧,1) (t). Then U, V are adapted processes (with respect to the same
filtration (F⇧ ) that Z is adapted to).
Proof. When ⌧ takes finitely many values it is easy to see that U, V are adapted and for
the general case, the proof is by approximating ⌧ by ⌧ m defined via (2.3.10).
Definition 2.35. For a stop time ⌧ with respect to a filtration (F⇧ ), the stopped -field is
defined by
F⌧ = {A 2 ([t Ft ) : A \ {⌧  t} 2 Ft 8t}.
We have seen that for a right continuous process Z, Z⌧ is a random variable, i.e.
measurable. The next lemma shows that indeed Z⌧ is F⌧ measurable.
Lemma 2.36. Let X be a right continuous (F⇧ )-adapted process and ⌧ be a stop time. Then
X⌧ is F⌧ measurable.
Proof. For a t < 1, we need to show that {X⌧  a} \ {⌧  t} 2 Ft for all a 2 R. Note
that
{X⌧  a} \ {⌧  t} = {Xt^⌧  a} \ {⌧  t}.
As seen in Lemma 2.34, {Xt^⌧  a} 2 Ft and of course, {⌧  t} 2 Ft .
Applying the previous result to the (deterministic) process Xt = t we get
Corollary 2.37. Every stop time ⌧ is F⌧ measurable.
T
Also, we have
Corollary 2.38. Let , ⌧ be two stop times. Then {  ⌧ } 2 F⌧ .
F
Proof. Let Xt = 1[ (!),1) (t). We have seen that X is r.c.l.l. adapted and hence X⌧ is F⌧
measurable. Note that X⌧ = 1{ ⌧ } . This completes the proof.
A
Here is another observation.
Lemma 2.39. Let ⌧ be a stop time and ⇠ be F⌧ measurable random variable. Then Z =
⇠ 1[⌧,1) is an adapted r.c.l.l. process.
R
Proof. Note that for any t, {Zt  a} = {⇠  a} \ {⌧  t} if a < 0 and {Zt  a} = ({⇠ 
a} \ {⌧  t}) [ {⌧ > t} if a 0. Since {⇠  a} 2 F⌧ , we have {⇠  a} \ {⌧  t} 2 Ft
c
and also {⌧ > t} = {⌧  t} 2 Ft . This shows Z is adapted. Of course it is r.c.l.l. by
D
definition.
The following result will be needed repeatedly in later chapters.
Lemma 2.40. Let X be any real-valued r.c.l.l. process adapted to a filtration (F⇧ ). Let
be any stop time. Then for any a > 0, ⌧ defined as follows is a stop time : if = 1 then
⌧ = 1 and if < 1 then
⌧ = inf{t > : |Xt X | a or |Xt X | a}. (2.3.11)
If ⌧ < 1 then ⌧ > and either |X⌧ X | a or |X⌧ X | a. In other words, when
the infimum is finite, it is actually minimum.
Proof. Let a process Y be defined by Yt = Xt Xt^ . Then as seen in Proposition 2.34,

Y is an r.c.l.l. adapted process. For any t > 0, let Qt = (Q \ [0, t]) [ {t}. Note that since
Y has r.c.l.l. paths one has
{! : ⌧ (!)  t} = \1
n=1 ([r2Qt {|Yr (!)| a 1
n }). (2.3.12)
To see this, let ⌦1 denote the left hand side and ⌦2 denote the right hand side.
Let ! 2 ⌦1 . If ⌧ (!) < t, then there is an s 2 [0, t) such that |Ys (!)| a or |Ys (!)| a
(recall the convention that Y0 = 0 and here a > 0). In either case, there exists a sequence
of rationals {rk } in (0, t) converging to s and limk |Yrk (!)| a and thus ! 2 ⌦2 . If ⌧ (!) = t
and if |Yt (!)| a then also ! 2 ⌦2 . To complete the proof of ⌦1 ✓ ⌦2 (recall t 2 Qt ),
we will show that ⌧ (!) = t and |Yt (!)| < a implies |Yt (!)| a. If not, i.e. |Yt (!)| < a,
then ⌧ = t implies that there exist sm > t, sm # t such that for each m, |Ysm (!)| a or
|Ysm (!)| a. This implies |Yt (!)| a and this proves ⌦1 ✓ ⌦2 .
T
For the other part, if ! 2 ⌦2 , then there exist {rn 2 Qt : n 1} such that |Yrn (!)|
a n1 . Since Qt ✓ [0, t], it follows that we can extract a subsequence rnk that converges
to s 2 [0, t]. By taking a further subsequence if necessary, we can assume that either
F
rnk s 8k or rnk < s 8k and thus |Yrnk (!)| ! |Ys (!)| a in the first case and |Yrnk (!)| !
|Ys (!)| a in the second case. Also, Y0 (!) = 0 and Y0 (!) = 0 and hence s 2 (0, t]. This
shows ⌧ (!)  s  t and thus ! 2 ⌦1 . This proves (2.3.12).
A
In each of the cases, we see that either |Y⌧ | a or |Y⌧ | a. Since Yt = 0 for t  , it
follows that ⌧ > . This completes the proof.
Remark 2.41. Note that ⌧ is the contact time for the set C = [a, 1) for the process Y .
R
Remark 2.42. If X is also a continuous process, the definition (2.3.11) is same as

⌧ = inf{t > : |Xt X | a}. (2.3.13)
D
Exercise 2.43. Construct an example to convince yourself that in the definition (2.3.11) of
⌧ , t > cannot be replaced by t . However, when X is continuous, in (2.3.13), t > can
be replaced by t .
Here is another result that will be used in the sequel.
Theorem 2.44. Let X be an r.c.l.l. adapted process with X0 = 0. For a > 0, let { i , : i
0} be defined inductively as follows: 0 = 0 and having defined j : j  i, let i+1 = 1 if
i = 1 and otherwise
i+1 = inf{t > i : |Xt X i| a or |Xt X i| a}. (2.3.14)

Then each i is a stop time. Further, (i) if i < 1, then i < i+1 and (ii) limi"1 i = 1.
Proof. That each i is a stop time and observation (i) follow from Lemma 2.40. Remains
to prove (ii). If for some ! 2 ⌦,
lim i (!) = t0 < 1
i"1
then for such an !, the left limit of the mapping s ! Xs (!) at t0 does not exist, a
contradiction. This proves (ii).
Exercise 2.45. Let X be the Poisson process with rate parameter . Let 0 = 0 and for
i 0, i+1 be defined by (2.3.14) with a = 1. For n 1 let
⌧n = n n 1.
Show that
T
(i) Nt (!) = k if and only if k (!) t< k+1 (!).
(ii) {⌧n : n 1} are independent random variables with P(⌧n > t) = exp{ t} for all n 1
and t 0.
F
Recall that (F⇧+ ) denotes the fight continuous filtration corresponding to the filtration
(F⇧ ) We now show that the hitting time of the interval ( 1, a) by an r.c.l.l. adapted
A
process is a stop time for the filtration (F⇧+ ).
Lemma 2.46. Let Y be an r.c.l.l. adapted process. Let a 2 R and let

R
⌧ = inf{t 0 : Yt < a}. (2.3.15)

Then ⌧ is a stop time for the filtration (F⇧+ ).
D
Proof. Note that for any s > 0, right continuity of t 7! Yt (!) implies that
{! : ⌧ (!) < s} = {! : Yr (!) < a for some r rational, r < s}
and hence {⌧ < s} 2 Fs .
Now for any t, for all k
1
{⌧  t} = \1
n=k {⌧ < t + } 2 Ft+ 1
n k
and hence {⌧  t} 2 Ft+ .
Remark 2.47. Similarly, it can be shown that the hitting time of an open set by an r.c.l.l.
adapted process is a stop time for the filtration (F⇧+ ).
Here is an observation about (F⇧+ ) stop times.
Lemma 2.48. Let : ⌦ 7! [0, 1] be such that
{ < t} 2 Ft 8t 0.
Then is a (F⇧+ )-stop time.
Proof. Let t be fixed and let tm = t + 2 m. Note that for all m 1,
{  t} = \1
n=m { < tn } 2 Ftm .
+
Thus {  t} 2 \1
m=1 Ftm = Ft .
Corollary 2.49. Let {⌧m : m 1} be a sequence of (F⇧ )-stop times. Let = inf{⌧m :
m 1} and ⇣ = sup{⌧m : m 1}. Then ⇣ is a (F⇧ )-stop time whereas is (F⇧+ )-stop
T
time.
Proof. The result follows by observing that
and
F
{⇣  t} = \m {⌧m  t}
{ < t} = [m {⌧m < t}.

A
Exercise 2.50. Show that A 2 F⌧ if and only if the process X defined by
R
Xt (!) = 1A (!)1[⌧ (!),1) (t)
is (F⇧ ) adapted.
D
Lemma 2.51. Let  ⌧ be two stop times. Then
F ✓ F⌧ .
Proof. Let A 2 F . Then for t 0, A \ {  t} 2 Ft and {⌧  t} 2 Ft and thus

A \ {  t} \ {⌧  t} = A \ {⌧  t} 2 Ft . Hence A 2 F⌧ .
Here is another result on the family of -fields {F⌧ : ⌧ a stop time}.
Theorem 2.52. Let , ⌧ be stop times. Then
{ = ⌧ } 2 F \ F⌧ .
Proof. Fix 0  t < 1. For n 1 and 1  k  2n let Ak,n = { k2n1 t <  k

2n t} and
Bk,n = { k2n1 t < ⌧  2kn t}. Note that
n
{ = ⌧ } \ {  t} = \1 2
n=1 [k=1 [Ak,n \ Bk,n ].
This shows { = ⌧ } \ {  t} 2 Ft for all t and thus { = ⌧ } 2 F . Symmetry now implies

{ = ⌧ } 2 F⌧ as well.
Martingales and stop times are intricately related as the next result shows.
Theorem 2.53. Let M be a r.c.l.l. martingale and ⌧ be a bounded stop time, ⌧  T . Then
E[MT | F⌧ ] = M⌧ . (2.3.16)
Proof. We have observed that M⌧ is F⌧ measurable. First let us consider the case when ⌧
is a stop time taking finitely many values, s1 < s2 < . . . < sm  T . Let Aj = {⌧ = sj }.
T
Since ⌧ is a stop time, Aj 2 Fsj . Clearly, {A1 , . . . , Am } forms a partition of ⌦. Let B 2 F⌧ .
Then, by definition of F⌧ it follows that Cj = B \ Aj 2 Fsj . Since M is a martingale,
E[MT | Fsj ] = Msj and hence
Summing over j we get

F
E[MT 1Cj ] = E[Msj 1Cj ] = E[M⌧ 1Cj ].
E[MT 1B ] = E[M⌧ 1B ].
A
This proves (2.3.16) when ⌧ takes finitely many values. For the general case, given ⌧  T ,
let
([2n ⌧ ] + 1)
⌧n = ^ T.
R
2n
Then for each n, ⌧n is a stop time that takes only finitely many values and further the
sequence {⌧n } decreases to ⌧ . By the part proven above we have
D
E[MT | F⌧n ] = M⌧n . (2.3.17)

Now given B 2 F⌧ , using ⌧  ⌧n and Lemma 2.51, we have B 2 F⌧n and hence using
(2.3.17), we have
E[MT 1B ] = E[M⌧n 1B ]. (2.3.18)
Now M⌧n converges to M⌧ (pointwise). Further, in view of Lemma 1.33, (2.3.17) implies
that {M⌧n : n 1} is uniformly integrable and hence M⌧n converges to M⌧ in L1 (P).
Thus taking limit as n ! 1 in (2.3.18) we get
E[MT 1B ] = E[M⌧ 1B ].
This holds for all B 2 F⌧ and hence we conclude that (2.3.16) is true.
It should be noted that we have not assumed that the underlying filtration is right
continuous. This result leads to the following
Corollary 2.54. Let M be an r.c.l.l. martingale. Let  ⌧  T be two bounded stop

times. Then
E[M⌧ | F ] = M . (2.3.19)
Proof. Taking conditional expectation given F in (2.3.16) and using F ✓ F⌧ we get

(2.3.19).
As in the discrete case, here too we have this characterization of martingales via stop
times.
Theorem 2.55. Let X be an r.c.l.l. (F⇧ ) adapted process with E[|Xt | ] < 1 for all t < 1.
T
Then X is an (F⇧ )-martingale if and only if for all (F⇧ )-stop times ⌧ taking finitely many
values in [0, 1), one has
E[X⌧ ] = E[X0 ]. (2.3.20)
F
Further if X is a martingale then for all bounded stop times
E[X ] = E[X0 ].
one has
(2.3.21)
A
Proof. Suppose X is a martingale. Then (2.3.20) and (2.3.21) follow from (2.3.16).
On the other hand suppose (2.3.20) is true for stop times taking finitely many values.
Fix s < t and A 2 Fs . To show E[Xt | Fs ] = Xs , suffices to prove that E[Xt 1A ] = E[Xs 1A ].
Now take
R
⌧ = s 1 A + t1 A c
to get
D
E[X0 ] = E[X⌧ ] = E[Xs 1A ] + E[Xt 1Ac ] (2.3.22)

and of course taking the constant stop time t, one has
E[X0 ] = E[Xt ] = E[Xt 1A ] + E[Xt 1Ac ]. (2.3.23)
Now using (2.3.22) and (2.3.23) it follows that E[Xs 1A ] = E[Xt 1A ] and hence X is a
martingale.
Corollary 2.56. For an r.c.l.l. martingale M and a stop time , N defined by

Nt = Mt^
is a martingale.
We also have the following result about two stop times.
Theorem 2.57. Suppose M is an r.c.l.l. (F⇧ )-martingale and and ⌧ are (F⇧ )-stop times
with  ⌧ . Suppose X is an r.c.l.l. (F⇧ ) adapted process. Let
Nt = X ^t (M⌧ ^t M ^t ).
Then N is a (F⇧ )-martingale if either (i) X is bounded or, if (ii) E[X 2 ] < 1 and M is
square integrable.
Proof. Clearly, N is adapted. First consider the case when X is bounded. We will show
that for any bounded stop time ⇣ (bounded by T ),
E[N⇣ ] = 0
and then invoke Theorem 2.53. Note that
T
N⇣ =X ^⇣ (M⌧ ^⇣ M ^⇣ )
=X ˜ (M⌧˜ M˜ )
where ˜ = ^ ⇣  ⌧˜ = ⌧ ^ ⇣ are also bounded stop times. Now
F
E[N⇣ ] = E[E[N⇣ | F ˜ ]]
= E[E[X ˜ (M⌧˜ M ˜ ) | F ˜ ]]
A
= E[X ˜ (E[M⌧˜ | F ˜ ] M ˜ )]
=0
as E[M⌧˜ | F ˜ ] = M ˜ by part (ii) of Corollary 2.54. This proves the result when X is
R
bounded. For (ii), approximating X by X n , where Xtn = max{min{Xt , n}, n} and using
(i) we conclude
E[X n^⇣ (M⌧ ^⇣ M ^⇣ )] = 0.
D
Since  ⌧ , we can check that

X n^⇣ (M⌧ ^⇣ M ^⇣ ) = X n (M⌧ ^⇣ M ^⇣ )
and hence that

E[X n (M⌧ ^⇣ M ^⇣ )] = 0.
By hypothesis, X is square integrable and by Doob’s maximal inequality (2.24) is square
integrable and hence
|X |(sup|Ms |)
sT
is integrable. The required result follows using dominated convergence theorem.

2.4. A Version of Monotone Class Theorem 59
Corollary 2.58. Suppose M is a r.c.l.l. (F⇧ )-martingale and and ⌧ are stop times with
 ⌧ . Suppose U is a F measurable random variable. Let
Nt = U (M⌧ ^t M ^t ).
Then N is a (F⇧ )-martingale if either (i) U is bounded or, if (ii) E[U 2 ] < 1 and M is
square integrable.
Proof. Let us define a process X as follows:

Xt (!) = U (!)1[ (!),1) (t).
Then X is adapted by Lemma 2.39. Now the result follows from Theorem 2.57.
Here is another variant that will be useful alter.
Theorem 2.59. Suppose M, N are r.c.l.l. (F⇧ )-martingales, E(Mt2 ) < 1, E(Nt2 ) < 1 and
T
and ⌧ are (F⇧ )-stop times with  ⌧ . Suppose B, X are r.c.l.l. (F⇧ ) adapted processes
with E(|Bt |) < 1 for all t and X bounded. Suppose that Z is also a martingale where
Zt = Mt Nt Bt . Let
Yt = X ^t [(M⌧ ^t
Then Y is a (F⇧ )-martingale.

M F
^t )(N⌧ ^t N ^t ) (B⌧ ^t B ^t )].
A
Proof. Since X is assumed to be bounded, it follows that Yt is integrable for all t. Once
again we will show that for all bounded stop times ⇣, E[Y⇣ ] = 0. Let ˜ = ^ ⇣  ⌧˜ = ⌧ ^ ⇣.
Note that
R
E[Y⇣ ] =E[X ˜ [(M⌧˜ M ˜ )(N⌧˜ N˜ ) (B⌧˜ B ˜ )]]

=E[X ˜ [(M⌧˜ N⌧˜ M˜ N˜ ) (B⌧˜ B˜ ) M ˜ (N⌧˜ N˜ ) N ˜ (M⌧˜ M ˜ )]]
=E[X ˜ (Z⌧˜ Z ˜ )] E[X ˜ M ˜ (N⌧˜ N˜ ) E[X ˜ N ˜ (M⌧˜ M ˜ )]]
D
=0
by Theorem 2.57 since M, N, Z are martingales. This completes the proof.
2.4 A Version of Monotone Class Theorem

The following functional version of the usual monotone class theorem is very useful in
dealing with integrals and their extension. Its proof is on the lines of the standard version
of monotone class theorem for sets. We will include a proof because of the central role this
result will play in our development of stochastic integrals.
Definition 2.60. A subset A ✓ B(⌦, F) is said to be closed under uniform and monotone
convergence if f 2 B(⌦, F), f n , g n , hn 2 A for n 1 are such that
(i) f n  f n+1 for all n 1 and f n converges to f pointwise
(ii) g n g n+1 for all n 1 and g n converges to g pointwise
(iii) hn converges to h uniformly
then f, g, h 2 A.
Here is the functional version of Monotone Class Theorem:
Theorem 2.61. Let A ✓ B(⌦, F) be closed under uniform and monotone convergence.
Suppose G ✓ A is an algebra such that
T
(i) (G) = F.
(ii) 9f n 2 G such that f n  f n+1 and f n converges to 1 pointwise.
Then A = B(⌦, F). F

Proof. Let K ✓ B(⌦, F) be the smallest class that contains G and is closed under uniform
A
and monotone convergence. Clearly, K contains constants and K ✓ A. Using arguments
similar to the usual (version for sets) monotone class theorem we will first prove that K
itself is an algebra. First we show that K is a vector space. For f 2 B(⌦, F), let
R
K0 (f ) = {g 2 K : ↵f + g 2 K, 8↵, 2 R}.
Note that K0 (f ) is closed under uniform and monotone convergence. First fix f 2 G. Since
G is an algebra, it follows that G ✓ K0 (f ) and hence K = K0 (f ). Now fix f 2 K. The
D
statement proven above implies that G ✓ K0 (f ) and since K0 (f ) is closed under uniform
and monotone convergence, it follows that K = K0 (f ). Thus K is a vector space.
To show that K is an algebra, for f 2 B(⌦, F) let
K1 (f ) = {g 2 K : f g 2 K}.
Since we have shown that K is a vector space containing constants, it follows that
K1 (f ) = K1 (f + c)
for any c 2 R. Clearly, if f 0, K1 (f ) is closed under monotone and uniform convergence.

Given g 2 B(⌦, F), choosing c 2 R such that f = g+c 0, it follows that K1 (g) = K1 (g+c)
2.4. A Version of Monotone Class Theorem 61
is closed under monotone and uniform convergence. Now proceeding as in the proof of K
being vector space, we can show that K is closed under multiplication and thus K is an
algebra.
Let C = {A 2 F : 1A 2 K}. In view of the assumption (ii), ⌦ 2 C. It is clearly a -field
and also B(⌦, C) ✓ K. Since (G) = F, one has (A) = F where
A = { {f  ↵} : f 2 G, ↵ 2 R}
and hence to complete the proof, suffices to show A ✓ C as that would imply F = C and
in turn
B(⌦, F) ✓ K ✓ A ✓ B(⌦, F)
implying K = A = B(⌦, F). Now to show that A ✓ C, fix f 2 G and ↵ 2 R and let
A = {f  ↵} 2 A. Let |f |  M . Let (x) = 1 for x  ↵ and (x) = 0 for x ↵ + 1 and
T
(x) = 1 x+↵ for ↵ < x < ↵+1. Using Weierstrass’s approximation theorem, we can get
polynomials pn that converge to uniformly on [ M, M ] and hence boundedly pointwise
on [ M, M ]. Now pn (f ) 2 G as G is an algebra and pn (f ) converges boundedly pointwise
F
to (f ). Thus (f ) 2 K. Since K is an algebra, it follows that ( (f ))m 2 K for all m 1.
Clearly ( (f ))m converges monotonically to 1A . Thus g m = 1 ( (f ))m 2 K increases
monotonically to 1 1A and hence 1 1A 2 K i.e. A 2 C completing the proof.
A
Here is a useful variant of the Monotone class Theorem.
Definition 2.62. A sequence of real-valued functions fn (on a set S) is said to converge

bp
R
boundedly pointwise to a function f (written as fn ! f ) if there exists number K such that

|fn (u)|  K for all n, u and fn (u) ! f (u) for all u 2 S.
Definition 2.63. A class A ✓ B(⌦, F) is said to be bp-closed if

D
bp
fn 2 A 8n 1, fn ! f implies f 2 A.
If a set A is bp-closed then it is also closed under monotone and uniform limits and thus
we can deduce the following useful variant of the Monotone class Theorem from Theorem
2.61
Theorem 2.64. Let A ✓ B(⌦, F) be bp-closed. Suppose G ✓ A is an algebra such that
(i) (G) = F.
(ii) 9f n 2 G such that f n  f n+1 and f n converges to 1 pointwise.

Then A = B(⌦, F).
Here is an important consequence of Theorem 2.64.
Theorem 2.65. Let F be a -field on ⌦ and let Q be a probability measure on (⌦, F).
Suppose G ✓ B(⌦, F) be an algebra such that (G) = F. Further, 9f n 2 G such that
bp
f n ! 1 (where 1 denotes the constant function 1). Then G is dense in L2 (⌦, F, Q).
Proof. Let K denote the closure of G in L2 (⌦, F, Q) and let A be the set of bounded
functions in K. Then G ✓ A and hence by Theorem 2.64 it follows that A = B(⌦, F).
Hence it follows that K = L2 (⌦, F, Q) as every function in L2 (Q) can be approximated by
bounded functions.
T
2.5 The UCP Metric
Let R0 (⌦, (F⇧ ), P) denote the class of all r.c.l.l. (F⇧ ) adapted processes. For processes
X, Y 2 R0 (⌦, (F⇧ ), P), let
ducp (X, Y ) =
1
X
m=1
2 m
F
E[min(1, sup |Xt
0tm
Yt |)]. (2.5.1)
A
Noting that ducp (X, Y ) = 0 if and only if X = Y (i.e. P(Xt = Yt 8t) = 1), it follows that
ducp is a metric on R0 (⌦, (F⇧ ), P). Now ducp (X n , X) ! 0 is equivalent to
sup |Xtn Xt | converging to 0 in probability 8T < 1,

R
0tT
ucp
also called uniform convergence in probability, written as X n ! X.
D
Remark 2.66. We have defined ducp (X, Y ) when X, Y are real-valued r.c.l.l. processes. We
can similarly define ducp (X, Y ) when X, Y are Rd -valued r.c.l.l. or l.c.r.l. processes. We will
use the same notation ducp in each of these cases.
In the rest of this section, d is a fixed integer and we will be talking about Rd -valued
processes, and |·| will be the Euclidean norm on Rd .
ucp
When ducp (X n , X) ! 0, sometimes we will write it as X n ! X (and thus the two
mean the same thing). Let X, Y 2 R0 (⌦, (F⇧ ), P). Then for > 0 and integers N 1,
observe that
N
ducp (X, Y )  2 + + P( sup |Xt Yt | > ) (2.5.2)
0tN
2.5. The UCP Metric 63
and
2N
P( sup |Xt Yt | > )  ducp (X, Y ). (2.5.3)
0tN
The following observation, stated here as a remark follows from (2.5.2)-(2.5.3).

ucp
Remark 2.67. Z n ! Z if and only if for all T < 1, " > 0, > 0, 9n0 such that for
n n0
P[ sup|Ztn Zt | > ] < ". (2.5.4)
tT
For an r.c.l.l. process Y , given T < 1, " > 0 one can choose K < 1 such that
P[ sup|Yt | > K ] < " (2.5.5)
tT
ucp
and hence using (2.5.4) it follows that if Z n ! Z, then given T < 1, " > 0 there exists
T
K < 1 such that
sup P[ sup|Ztn | > K ] < ". (2.5.6)
n 1 tT
The following result uses standard techniques from measure theory and functional anal-
F
ysis but a proof is included as it plays an important part in subsequent chapters.
Theorem 2.68. The space R0 (⌦, (F⇧ ), P) is complete under the metric ducp .
A
Proof. Let {X n : n 1} be a Cauchy sequence in ducp metric. By taking a subsequence if
necessary, we can assume without loss of generality that ducp (X n+1 , X n ) < 2 n and hence
1 X
X 1
R
2 m
E[min(1, sup |Xtn+1 Xtn |)] < 1
n=1 m=1 0tm
or equivalently
1
X 1
X
m
E[min(1, sup |Xtn+1 Xtn |)] < 1
D
2
m=1 n=1 0tm
and thus for all m 1 one has (using, for a random variable Z with Z 0, E[Z] < 1
implies Z < 1 a.s.)
1
X
[min(1, sup |Xtn+1 Xtn |)] < 1 a.s.
n=1 0tm
P P
Note that for a [0, 1)-valued sequence {an }, n min(an , 1) < 1 if and only if n an <
1. Hence for all m 1 we have
X1
sup |Xtn+1 Xtn | < 1 a.s.
n=1 0tm
P
Again, noting that for a real-valued sequence {bn }, n |bn+1 bn | < 1 implies that {bn }
is cauchy and hence converges, we conclude that outside a fixed null set (say N ), Xtn
converges uniformly on [0, m] for every m. So we define the limit to be Xt , which is an
r.c.l.l. process. On the exceptional null set N , Xt is defined to be zero. Note that
n+k
X1
ducp (X n+k , X n )  ducp (X j+1 , X j )
j=n
n+k
X1
j
 2
j=n
n+1
2 .
As a consequence, (using definition of ducp ) we get that for all integers m,
E[min(1, sup |Xtn Xtn+k |)]  2m 2 n+1
.
T
0tm
Taking limit as k ! 1 and invoking Dominated convergence theorem we conclude
E[min(1, sup |Xtn Xt |)]  2m 2 n+1
.
0tm
It follows that for any T < 1, 0 <
P( sup |Xtn
0tT
F
< 1 we have
1
Xt |) > )  2(T +1) 2 n+1
. (2.5.7)
A
and hence, invoking Remark 2.67, it follows that X n converges in ucp metric to X. Thus
every Cauchy sequence converges and so the space is complete under the metric ducp .
Here is a result that will be useful later.

R
Theorem 2.69. Suppose Z n , Z are r.c.l.l. adapted processes such that

ucp
Zn ! Z.
D
k
Then there exists a subsequence {nk } such that Y k = Z n satisfies
(i) sup0tT |Ytk Zt | ! 0 a.s. 8T < 1.
(ii) There exists an r.c.l.l. adapted increasing process H such that

|Ytk |  Ht 8t < 1, 8n 1. (2.5.8)
Proof. Since ducp (Z n , Z) ! 0, for k 1, we can choose nk with nk+1 > nk such that
k
ducp (Z n , Z)  2 k . Then as seen in the proof of Theorem 2.68, this implies
1
X
[sup|Ytk Zt |] < 1, 8T < 1 a.s.
k=1 tT
2.5. The UCP Metric 65
Hence (i) above holds for this choice of {nk }. Further, defining
1
X
Ht = sup [ |Ysk Zs | + |Zs |]
0st
k=1
we have that H is an r.c.l.l. adapted increasing process and |Y k |  H for all k 1.
Remark 2.70. If we have two, or finitely many sequences {Z i,n } converging to Z i in ducp ,
i = 1, 2, . . . , p then we can get one common subsequence {nk } and a process H such that (i),
(ii) above hold for i = 1, 2, . . . p. All we need to do is to choose {nk } such that
k
ducp (Z i,n , Z i )  2 k
, i = 1, 2 . . . p.
Exercise 2.71. An alternative way of obtaining the conclusion in Remark 2.70 is to apply
Theorem 2.69 to an appropriately defined Rdp -valued processes.
T
The following Lemma will play an important role in the theory of stochastic integration.
Lemma 2.72. Let Z n , Z be adapted processes and let ⌧ m be a sequence of stop times such
that ⌧ m " 1. Suppose that for each m
n
Zt^⌧ m
ucp F
! Zt^⌧ m as n " 1. (2.5.9)
A
Then
ucp
Zn ! Z as n " 1.
Proof. Fix T < 1, " > 0 and ⌘ > 0. We need to show that 9n0 such that for n n0
R
P[ sup|Ztn Zt | > ⌘ ] < ". (2.5.10)

tT
First, using ⌧ m " 1, fix m such that

D
P[ ⌧ m < T ] < "/2. (2.5.11)

n ucp
Using Zt^⌧ m ! Zt^⌧ m , get n1 such that for n n1
n
P[ sup|Zt^⌧ m Zt^⌧ m | > ⌘ ] < "/2. (2.5.12)
tT
Now,
{ sup|Ztn n
Zt | > ⌘} ✓ {{sup|Zt^⌧ m Zt^⌧ m | > ⌘} [ {⌧ m < T }}
tT tT
and hence for n n1 , (2.5.10) follows from (2.5.11) and (2.5.12).
The same argument as above also yields the following.

Corollary 2.73. Let Z n be r.c.l.l. adapted processes and let ⌧ m be a sequence of stop
times such that ⌧ m " 1. For n 1, m 1 let
Ytn,m = Zt^⌧
n
m.
Suppose that for each m, {Y n,m : n 1} is Cauchy in ducp metric then Z n is Cauchy in
in ducp metric.
2.6 The Lebesgue-Stieltjes Integral

Let G : [0, 1) 7! R be an r.c.l.l. function. For 0  a < b < 1 the total variation Var[a,b]
of G(s) over [a, b] and Var(a,b] over (a, b] are defined as follows:
m
X
Var(a,b] (G) = sup [ |G(tj ) G(tj 1 )|]. (2.6.1)
T
{ti }:a=t0 <t1 <...<tm =b, m 1 j=1
Var[a,b] (G) = |G(a)| + Var(a,b] (G).
F
If Var[0,t] (G) < 1 for all t, G will be called a function with finite variation. It is
well known that a function has finite variation paths if and only if it can be expressed as
di↵erence of two increasing functions.
A
If Var[0,t] (G) < 1 for all t, the function |G|t = Var[0,t] (G) is then an increasing [0, 1)-
valued function. Let us fix such a function G.
For any T fixed, there exists a unique countably additive measure and a countably
additive signed measure µ on the Borel -field of [0, T ] such that
R
([0, t]) = |G|(t) 8t  T (2.6.2)
µ([0, t]) = G(t) 8t  T. (2.6.3)

D
Here, is the total variation measure of the signed measure .

R
For measurable function h on [0, T ], if hd < 1, then we define
Z t Z
|h|s d|G|s = |h|1[0,t] d (2.6.4)
0
and Z Z
t
hs dGs = h1[0,t] dµ. (2.6.5)
0
Note that we have Z Z
t t
| hs dGs |  |h|s d|G|s . (2.6.6)
0 0
2.6. The Lebesgue-Stieltjes Integral 67
Rt
It follows that if h is a bounded measurable function on [0, 1), then hdG is defined
0
bp Rt
and further ifhn ! h, then the dominated convergence theorem yields that Htn = 0 hn dG
Rt
converges to H(t) = 0 hdG uniformly on compact subsets.
Exercise 2.74. Let G be an r.c.l.l. function on [0, 1) such that |G|t < 1 for all t < 1.
Show that for all T < 1
X
|( G)t | < 1. (2.6.7)
tT
Note that as seen in Exercise 2.1, {t : |( G)t | > 0} is a countable set and thus the sum
appearing above is a sum of countably many terms.
Hint: Observe that the left hand side in (2.6.7) is less than or equal to |G|T .
Let us denote by V+ = V+ (⌦, (F⇧ ), P) the class of (F⇧ ) adapted r.c.l.l. increasing
processes A with A0 0 and by V = V(⌦, (F⇧ ), P) the class of r.c.l.l. adapted processes B
T
such that A defined by
At (!) = Var[0,t] (B· (!)) (2.6.8)
F
belongs to V+ . A process A 2 V will be called process with finite variation paths. It is
easy to see that B 2 V if and only if B can be written as di↵erence of two processes in
V+ : indeed, if A is defined by (2.6.8), we have B = D C where D = 12 (A + B) and
A
C = 12 (A B) and C, D 2 V+ . Let V0 and V+ 0 denote the class of processes A in V and
V respectively such that A0 = 0. For B 2 V, we will denote the process A defined by
+
(2.6.8) as A = Var(B).
A process A 2 V will be said to be purely discontinuous if
R
X
At = A0 + ( A)s .
0<st
Exercise 2.75. Show that every A 2 V can be written uniquely as A = B +C with B, C 2 V,

D
B being a continuous process with B0 = 0 and C being a purely discontinuous process.
Lemma 2.76. Let B 2 V and let X be a bounded l.c.r.l. adapted process. Then
Z t
Ct (!) = Xs (!)dBs (!) (2.6.9)
0
is well defined and is an r.c.l.l. adapted process. Further, C 2 V.
Proof. For every ! 2 ⌦, t 7! Xt (!) is a bounded measurable function and hence C is well
defined. For n 1 and i 0 let tni = ni . Let
Xtn = Xtni for tni  t < tni+1 .
bp
Then X n ! X. Clearly
Z t X
Ctn (!) = Xsn (!)dBs (!) = Xtni (Btni+1 ^t Btni ^t )
0 i : tn
i t
bp
is r.c.l.l. adapted and further, C n ! C. Thus C is also an r.c.l.l. adapted process. Let
A = Var(B). For any s < t,
Z t
|Ct (!) Cs (!)|  |Xu (!)|dAs (!)
s
 K(At (!) As (!)).
where K is a bound for the process X. Since A is an increasing process, it follows that
Var[0,T ] (C)(!)  KAT (!) < 1 for all T < 1 and for all !.
T
Exercise 2.77. Show that the conclusion in Lemma 2.76 is true even when X is a bounded
r.c.l.l. adapted process. In this case, Dtn defined by
Z t X
n
Dt (!) = Xsn (!)dBs (!) = Xtni+1 ^t (Btni+1 ^t Btni ^t )
converges to
Rt
0 X dB.
0
Fi : tn
i t
A
R
D
Chapter 3
The Ito Integral
3.1 Quadratic Variation of Brownian Motion
T
Let (Wt ) denote a one dimensional Brownian motion on a probability space (⌦, F, P). We
have seen that W is a martingale w.r.t. its natural filtration (F⇧W ) and with Mt = Wt2 t,
M is also (F⇧W ) martingale. These properties are easy consequence of the independent
increment property of Brownian motion. F
Wiener and Ito realized the need to give a meaning to limit of what appeared to be
A
Riemann-Stieltjes sums for the integral
Z t
fs dWs (3.1.1)
0
in di↵erent contexts- while in case of Wiener, the integrand was a deterministic function,
R
Ito needed to consider a random process (fs ) that was a non-anticipating function of W -
i.e. f is adapted to (F⇧W ).
It is well known that paths s 7! Ws (!) are nowhere di↵erentiable for almost all !
D
and hence we cannot interpret the integral in (3.1.1) as a path-by-path Riemann-Stieltjes

integral. We will deduce the later result from a weaker result that is relevant for stochastic
integration.
Theorem 3.1. Let (Wt ) be a Brownian motion. Let tni = i2 n , i 0, n 1. Let

n
P1 n
P1 2
Vt = i=0 |Wti+1 ^t Wtni ^t |, Qt = i=0 (Wti+1 ^t Wtni ^t ) . Then for all t > 0, (a)
n n
n n
Vt ! 1 a.s. and (b) Qt ! t a.s.
Proof. We will first prove (b). Let us fix t < 1 and let
Xin = Wtni+1 ^t Wtni ^t , Zin = (Wtni+1 ^t Wtni ^t )2 (tni+1 ^ t tni ^ t).
69
70 Chapter 3. The Ito Integral
Then from properties of Brownian motion it follows that {Xin , i 0} are independent
random variables with normal distribution and E(Xi ) = 0, E(Xi ) = (tni+1 ^ t tni ^ t).
n n 2
So, {Zin , i 0} are independent random variables with E(Zin ) = 0 and E(Zin )2 = 2((tni+1 ^
t tni ^ t))2 . Now
1
X
n 2
E(Qt t) =E( Zin )2
i=0
1
X
= E(Zin )2
i=0
X1
(3.1.2)
=2 (tni+1 ^ t tni ^ t)2
i=0
1
X
n+1
2 (tni+1 ^ t tni ^ t)
T
i=0
n+1
=2 t.
Note that each of the sum appearing above is actually a finite sum. Thus
so that
P1 n
n=1 (Qt t)2
E
X1
(Qnt t)2  t < 1
n=1
< 1 a.s. and hence Qnt ! t a.s.
F
A
For (a), let ↵( , !, t) = sup{|Wu (!) Wv (!)| : |u v|  , u, v 2 [0, t]}. Then uniform
continuity of u 7! Wu (!) implies that for each !, t < 1,
lim ↵( , !, t) = 0. (3.1.3)
R
#0
Now note that for any !,
1
X
Qnt (!) ( max |Wtni+1 ^t (!) Wtni ^t (!)|)( |Wtni+1 ^t Wtni ^t |)
D
0i<1 (3.1.4)
i=0
n
=↵(2 , !, t)Vtn (!).
So if lim inf n Vtn (!) < 1 for some !, then lim inf n Qnt (!) = 0 in view of (3.1.3) and (3.1.4).
For t > 0, since Qnt ! t a.s., we must have Vtn ! 1 a.s.
Exercise 3.2. For any sequence of partitions

0 = tm m m
0 < t1 < . . . < tn < . . . ; tm
n " 1 as n " 1 (3.1.5)
of [0, 1) such that for all T < 1,
m (T ) =( sup (tm
n+1 tm
n )) ! 0 as m " 1 (3.1.6)
{n : tm
n T }
3.2. Levy’s Characterization of the Brownian motion 71
let
1
X
Qm
t = (Wtm
n+1 ^t
Wtm
n ^t
)2 . (3.1.7)
n=0
Show that for each t, Qm
t converges in probability to t.
Remark 3.3. It is well known that the paths of Brownian motion are nowhere di↵erentiable.
For this and other path properties of Brownian motion, see Breiman [5], McKean [45], Karatzas
and Shreve[42].
Remark 3.4. Since the paths of Brownian motion do not have finite variation on any interval,
R
we cannot invoke Riemann-Stieltjes integration theory for interpreting X dW , where W is
Brownian motion. The following calculation shows that the Riemann-Stieltjes sums do not
R
converge in any weaker sense (say in probability) either. Let us consider W dW . Let tni =
T
i2 n , i 0, n 1. The question is whether the sums
1
X
Wsni ^t (Wtni+1 ^t Wtni ^t ) (3.1.8)
i=0
cases sni = tni+1 and sni = tni :

1
X
F
converge to some limit for all choices of sni such that tni  sni  tni+1 . Let us consider two
A
Ant = Wtni+1 ^t (Wtni+1 ^t Wtni ^t ) (3.1.9)
i=0
1
X
Btn = Wtni ^t (Wtni+1 ^t Wtni ^t ). (3.1.10)
R
i=0
Now Ant and Btn cannot converge to the same limit as their di↵erence satisfies
(Ant Btn ) = Qnt .

D
Thus even in this simple case, the Riemann-Stieltjes sums do not converge to a unique limit.
In this case, it is possible to show that Ant and Btn actually do converge but to two di↵erent
limits. It is possible to choose {sni } so that the Riemann sums in (3.1.8) do not converge.
3.2 Levy’s Characterization of the Brownian motion

Let (Wt ) be a Wiener process and let (Ft ) be a filtration such that W is a martingale w.r.t.
(Ft ). Further suppose that for every s,
{Wt Ws : t s} is independent of Fs . (3.2.1)

It follows that Mt = Wt2 t is also a martingale w.r.t (Ft ). Levy had proved that if W is
any continuous process such that both W, M are (F⇧ )-martingales then W is a Brownian
motion and (3.2.1) holds. Most proofs available in texts today deduce this as an application
of Ito’s formula. We will give an elementary proof of this result which uses interplay of
martingales and stop times. The proof is motivated by the proof given in Ito’s lecture notes
[24], but the same has been simplified using partition via stop times instead of deterministic
partitions.
We will use the following inequalities on the exponential function which can be easily
proven using Taylor’s theorem with remainder. For a, b 2 R
1
|eb (1 + b)|  e|b| |b|2
2
ia
|e 1|  |a|
1 2 1
T
|eia (1 + ia a )|  |a|3 .
2 6
Using these inequalities, we conclude that for a, b such that |a|  , |b|  , < loge (2),
we have
|eia+b (1 + ia
1 2
2
a + b)| F
 |eia [eb (1 + b)] + b(eia 1) + (eia (1 + ia
1 2
a ))|
A
2 (3.2.2)
1 |b| 2 1 3
 ( e |b| + |b||a| + |a| )
2 6
2
 (2|b| + |a| ).
R
Theorem 3.5. Let X be a continuous process adapted to a filtration (F⇧ ) and let Mt =
Xt2 t for t 0. Suppose that (i) X0 = 0, (ii) X is a (F⇧ )-martingale and (iii) M is a
(F⇧ ) martingale. Then X is a Brownian motion and further, for all s
D
{(Xt Xs ) : t s} is independent of Fs .
Proof. We will prove this in a series of steps.

step 1: For bounded stop times  ⌧ , say ⌧  T ,
E[(X⌧ X )2 ] = E[(⌧ )]. (3.2.3)
To see this, Corollary 2.58 and the hypothesis that M is a martingale imply that
Yt = X⌧2^t X 2^t (⌧ ^ t ^ t)
is a martingale and hence E[YT ] = E[Y0 ] = 0. This proves step 1.

3.2. Levy’s Characterization of the Brownian motion 73
Let us fix 2 R and let

1 2
Zt = exp{i Xt +
t}.
2
step 2: For each bounded stop time , E[Z ] = 1. This would show that Z is a (F⇧ )-
martingale. To prove this claim, fix and let  T . Let be sufficiently small such that
(| | + 2 ) < loge (2). Let us define a sequence of stop times {⌧i : i 1} inductively as
follows: ⌧0 = 0 and for i 0,
⌧i+1 = inf{t ⌧i : |Xt X⌧i | or |t ⌧i | or t } (3.2.4)
Inductively, using Theorem 2.44 one can prove that each ⌧i is a stop time and that for each
!, ⌧j (!) = (!) for sufficiently large j. Further, continuity of the process implies
|X⌧i+1 X⌧i |  , |⌧i+1 ⌧i |  . (3.2.5)
Let us write
T
m
X1
Z ⌧m 1= (Z⌧k+1 Z⌧k ). (3.2.6)
k=0
Note that
E[(Z⌧k+1 Z⌧k )] = E[Z⌧k (ei
= E[Z⌧k E(ei
F
(X⌧k+1 X⌧k )+ 12
(X⌧k+1 X⌧k )+ 12
2 (⌧
2 (⌧
k+1
k+1
⌧k )
⌧k )
1)]
1 | F⌧k )]
A
Since E[X⌧k+1 X⌧k | F⌧k ] = 0 as X is a martingale and
E[(X⌧k+1 X⌧k ) 2 (⌧k+1 ⌧k ) | F⌧k ] = 0 (3.2.7)
R
as seen in step 1 above, we have

(X⌧k+1 X⌧k )+ 12 2 (⌧
E[ei k+1 ⌧k )
1 | F⌧k ]
X⌧k )+ 12 2 (⌧
= E[ei (X⌧k+1 k+1 ⌧k )
{1 + i (X⌧k+1 X⌧k )
D
1 2 1 2
2 (X⌧k+1 X⌧k ) 2 + 2 (⌧k+1 ⌧k )} | F⌧k ]
Using (3.2.2), (3.2.5) and the choice of , we can conclude that the expression on the right
hand side inside the conditional expectation is bounded by
2
((X⌧k+1 X⌧k )2 + (⌧k+1 ⌧k ))
Putting together these observations and (3.2.7), we conclude that
2
|E[(Z⌧k+1 Z⌧k )]|  2 E[(⌧k+1 ⌧k )].
As a consequence
2
|E[Z⌧m 1]|  2 E[⌧m ].
1 2T
Now Z⌧m is bounded by e 2 and converges to Z , we conclude
2
|E[Z 1]|  2 T.
Since this holds for all small > 0 it follows that
E[Z ] = 1
and this completes the proof of step 2.
step 3: For s < t, 2 R,
1 2 (t
E[e(i (Xt Xs ))
| Fs ] = e 2
s)
. (3.2.8)
We have seen that Zt is a martingale and (3.2.8) follows from it since Xs is Fs measurable.
As a consequence
1 2
E[e(i (Xt Xs )) ] = e 2 (t s) . (3.2.9)
T
and so the distribution of Xt Xs is Gaussian with mean 0 and variance (t s).
step 4:
For s < t, , ✓ 2 R, a Fs measurable random variable Y we have
E[e(i (Xt Xs )+i✓Y )
F
] = E[e(i (Xt Xs ))
]E[e(i✓Y ) ].
The relation (3.2.10) is an immediate consequence of (3.2.8). We have already seen that
(3.2.10)
A
Xt Xs has Gaussian distribution with mean 0 and variance t s and (3.2.10) implies
that Xt Xs is independent of Fs , in particular, Xt Xs is independent of {Xu : u  s}.
This completes the proof.
R
Let W = (W 1 , W 2 , . . . , W d ) be d-dimensional Brownian motion, where W j is the j th

component. In other words, each W j is a real-valued Brownian motion and W 1 , W 2 , . . . , W d
are independent.
P
D
For any ✓ = (✓1 , ✓2 , . . . , ✓d ) 2 Rd with |✓| = dj=1 (✓j )2 = 1,

d
X
Xt✓ = ✓j Wtj (3.2.11)
j=1
is itself a Brownian motion and hence with

Mt✓ = (Xt✓ )2 t, (3.2.12)
8✓ 2 Rd with |✓| = 1; X ✓ , M ✓ are (F⇧W )-martingales. (3.2.13)
Indeed, using Theorem 3.5, we will show that (3.2.13) characterizes multidimensional
Brownian motion.
3.3. The Ito Integral 75
Theorem 3.6. Let W be an Rd -valued continuous process such that W0 = 0. Suppose (F⇧ )
is a filtration such that W is (F⇧ ) adapted. Suppose W satisfies
8✓ 2 Rd with |✓| = 1; X ✓ , M ✓ are (F⇧ )-martingales, (3.2.14)
where X ✓ and M ✓ are defined via (3.2.11) and (3.2.12). Then W is a d-dimensional
Brownian motion and further, for 0  s  t
(Wt Ws ) is independent of Fs .
Proof. Theorem 3.5 implies that for ✓ 2 Rd with |✓| = 1 and 2R

1 2
E[exp{ (✓ · Wt ✓ · Ws )} | Fs ] = exp{ 2 (t s)}.
This implies that W is a Brownian motion. Independence of (Wt Ws ) and Fs also follows
T
as in Theorem 3.5.
Theorems 3.5 and 3.6 are called Levy’s characterization of Brownian motion (one di-
3.3 The Ito Integral

F
mensional and multidimensional cases respectively).
A
Let S be the class of stochastic processes f of the form
m
X
R
fs (!) = a0 (!)1{0} (s) + aj+1 (!)1(sj ,sj+1 ] (s) (3.3.1)

j=0
where 0 = s0 < s1 < s2 < . . . < sm+1 < 1, aj is bounded Fsj 1 measurable random
variable for 1  j  (m + 1), and a0 is bounded F0 measurable. Elements of S will be
D
R
called simple processes. For an f given by (3.3.1), we define X = f dW by
m
X
Xt (!) = aj+1 (!)(Wsj+1 ^t (!) Wsj ^t (!)). (3.3.2)
j=0
R
a0 does not appear on the right side because W0 = 0. It can be easily seen that f dW
defined via (3.3.1) and (3.3.2) for f 2 S does not depend upon the representation (3.3.1).
In other words, if g is given by
n
X
gt (!) = b0 (!)1{0} (s) + bj+1 (!)1(rj ,rj+1 ] (t) (3.3.3)
j=0
where 0 = r0 < r1 < . . . < rn+1 and bj is Frj 1 measurable bounded random variable,
R R
1  j  (n + 1), and b0 is bounded F0 measurable and f = g, then f dW = gdW i.e.
m
X
aj+1 (!)(Wsj+1 ^t (!) Wsj ^t (!))
j=0
n (3.3.4)
X
= bj+1 (!)(Wrj+1 ^t (!) Wrj ^t (!)).
j=0
Rt
By definition, X is a continuous adapted process. We will denote Xt as 0 f dW . We
will obtain an estimate on the growth of the integral defined above for simple f 2 S and
then extend the integral to an appropriate class of integrands - those that can be obtained
as limits of simple processes. This approach is di↵erent from the one adopted by Ito and
we have adopted this approach with an aim to generalize the same to martingales.
R
T
We first note some properties of f dW for f 2 S and obtain an estimate.
Lemma 3.7. Let f, g 2 S and let a, b 2 R. Then

Z t Z t Z t
(af + bg)dW = a
0
F
f dW + b
0
gdW.
0
Proof. Let f, g have representations (3.3.1) and (3.3.3) respectively. Easy to see that we
(3.3.5)
A
can get 0 = t0 < t1 < . . . < tk such that
{tj : 0  j  k} = {sj : 0  j  m} [ {rj : 0  j  n}

R
and then represent both f, g over common time partition. Then the result (3.3.5) follows
easily.
Rt Rt Rt
Lemma 3.8. Let f, g 2 S, and let Yt = 0 f dW , Zt = 0 gdW and At = 0 fs gs ds,
D
Mt = Yt Zt At . Then Y, Z, M are (F⇧ )-martingales.
Proof. By linearity property (3.3.5) and the fact that sum of martingales is a martingale,
suffices to prove the lemma in the following two cases:
Case 1: 0  s < r and
ft = a1(s,r] (t), gt = b1(s,r] (t), a, b are Fs measurable.
Case 2: 0  s < r  u < v and
ft = a1(s,r] (t), gt = b1(u,v] (t), a is Fs measurable and b is Fu measurable.

Here in both cases, a, b are assumed to be bounded. In both the cases, Yt = a(Wt^r Wt^s ).
That Y is a martingale follows from Theorem 2.57. Thus in both cases, Y is an (F⇧ )-
martingale and similarly, so is Z. Remains to show that M is a martingale. In Case 1,
writing Nt = Wt2 t
Mt =ab((Wt^r Wt^s )2 (t ^ r t ^ s))
2 2
=ab((Wt^r Wt^s ) (t ^ r t ^ s) 2Wt^s (Wt^r Wt^s ))
=ab(Nt^r Nt^s ) 2abWt^s (Wt^r Wt^s ).
Recalling that N, W are martingales, it follows from Theorem 2.57 that M is a martingale
as
abWt^s (Wt^r Wt^s ) = abWs (Wt^r Wt^s ).
In case 2, recalling 0  s  r  u  v, note that
T
Mt =a(Wt^r Wt^s )b(Wt^v Wtû )
=a(Wr Ws )b(Wt^v Wtû )
as Mt = 0 if t  u. This completes the proof.
Rt
Theorem 3.9. Let f 2 S, Mt = 0 f dW and Nt = Mt2
(F⇧ )-martingales. Further, For any T < 1,
Z t
F
Z T
Rt 2
0 fs ds. Then M and N are
A
2
E[sup| f dW | ]  4E[ fs2 ds]. (3.3.6)
tT 0 0
Proof. The fact that M and N are martingales follow from Lemma 3.8. As a consequence
R
E[NT ] = 0 and hence

Z T Z T
2
E[( f dW ) ] = E[ fs2 ds]. (3.3.7)
0 0
Now the growth inequality (3.3.6) follows from Doob’s maximal inequality (2.24) applied
D
to N and using (3.3.7).
We will use the growth inequality (3.3.7) to extend the integral to a larger class of
functions that can be approximated in the norm defined by the right hand side in (3.3.7).
Each f 2 S can be viewed as a real valued function on ⌦ e = [0, 1) ⇥ ⌦. It is easy to
e
see that S is an algebra. Let P be the -field generated by S, i.e. the smallest -field on ⌦
such that every element of S is measurable w.r.t. P. Then by Theorem 2.65, the class of
functions that can be approximated by S in the norm
Z T
1
(E[ fs2 ds]) 2
0
equals the class of P measurable functions f with finite norm.

The -field P is called the predictable -field. We will discuss the predictable -field
in the next chapter. We note here that every left continuous adapted process X is P
measurable as it is the pointwise limit of
m2 m
X
Xtm = X0 1{0} + X j 1( j j+1
, ] (t).
2m 2m 2m
j=0
Lemma 3.10. Let f be a predictable process such that

Z T
E[ fs2 ds] < 1 8T < 1. (3.3.8)
0
Then there exists a continuous adapted process Y such that for all simple predictable pro-
cesses h 2 S,
Z t Z T
T
E[( sup |Yt hdW |)2 ]  4E[ (fs hs )2 ds] 8T < 1. (3.3.9)
0tT 0 0
Further, Y and Z are (F⇧ )-martingales where
Z t
Zt = Yt2
F 0
fs2 ds.
e P) defined as follows: for P measurable

Proof. For r > 0, let µr be the measure on (⌦,
A
bounded functions g Z Z r
gdµr = E[ gs ds]
⌦e 0
and let us denote the L2norm on L (µ
r ) by k·k2,µr . By Theorem 2.65, S is dense in L (µr )
2 2
R
for every r > 0 and hence for integers m 1, we can get f m 2 S such that
kf f m k2,µm  2 m 1
. (3.3.10)
Using k·k2,µr  k·k2,µs for r  s it follows that for k 1
D
kf m+k f m k2,µm  2 m
. (3.3.11)
Denoting the L2 (⌦, F, P) norm by k·k2,P , the growth inequality (3.3.6) can be rewritten as,
for g 2 S, m 1, Z t
k sup | gdW | k2,P  2kgk2,µm (3.3.12)
0tm 0
Rt Rt
Recall that f k 2 S and hence 0 f k dW is already defined. Let Ytk = 0 f k dW . Now using
(3.3.11) and (3.3.12), we conclude that for k 1
k[ sup |Ytm+k Ytm | ]k2,P  2 m+1
. (3.3.13)
0tm
Fix an integer n. For m n, using (3.3.13) for k = 1 we get
k[ sup |Ytm+1 Ytm | ]k2,P  2 m+1

. (3.3.14)
0tn
and hence
1
X 1
X
k[ sup |Ytm+1 Ytm | ]k2,P  k[ sup |Ytm+1 Ytm | ]k2,P
m=n 0tn m=n 0tn
X1
m+1
 2
m=n
<1.
Hence,
1
X
[ sup |Ytm+1 Ytm |] < 1 a.s. P. (3.3.15)
T
m=n 0tn
So let
1
X
Nn = {! : [ sup |Ytm+1 (!) Ytm (!)|] = 1}
m=n 0tn
and let N = [1 F
n=1 Nn . Then N is a P-null set. For ! 62 N , let us define
Yt (!) = lim Ytm (!)

A
m!1
and for ! 2 N , let Yt (!) = 0. It follows from (3.3.15) that for all T < 1, ! 62 N
sup |Ytm (!) Yt (!)| ! 0. (3.3.16)

0tT
R
Thus Y is a process with continuous paths. Now using (3.3.12) for f m h 2 S we get
Z t Z T
m 2
E[( sup |Yt hdW |) ]  4E[ (f m h)2s ds]. (3.3.17)
0tT 0 0
D
In view of (3.3.10), the right hand side above converges to

Z T
E[ (fs hs )2 ds].
0
Using Fatou’s lemma and (3.3.16) along with P(N ) = 0, taking lim inf in (3.3.17) we
conclude that (3.3.9) is true. From these observations, it follows that Ytm converges to Yt
in L2 (P) for each fixed t. The observation k·k2,µr  k·k2,µs for r  s and (3.3.10) implies
that for all r, kf f m k2,µr ! 0 and hence for all t
Z t
E[ (fs fsm )2 ds] ! 0.
0
As a consequence,
Z t
E[ |(fs )2 (fsm )2 |ds] ! 0
0
and hence Z Z
t t
E[| (fsm )2 ds fs2 ds| ] ! 0.
0 0
Rt n 2
By Theorem 3.9 , we have Y n and Z n are martingales where Ztn = (Ytn )2 0 (fs ) ds.
n 1 n 1
As observed above Yt converges in L (P) to Yt and Zt converges in L (P) to Zt for each
t and hence Y and Z are martingales.
Remark 3.11. From the proof of the Lemma it also follows that Y is uniquely determined by
the property (3.3.9), for if Ỹ is another process that satisfies (3.3.9), then using it for h = f m
as in the proof above, we conclude that Y m converges almost surely to Ỹ and hence Y = Ỹ .
T
RT
Definition 3.12. For a predictable process f such that E[ 0 fs2 ds] < 1 8T < 1, we define
Rt
the Ito integral 0 f dW to be the process Y that satisfies (3.3.9).
The next result gives the basic properties of the Ito integral
essentially been proved above.
F R
f dW , most of them have
A
Theorem 3.13. Let f, g be predictable processes satisfying (3.3.8).Then
Z t Z t Z t
(af + bg)dW = a f dW + b gdW. (3.3.18)
0 0 0
R
Rt Rt
Let Mt = 0 f dW and Nt = Mt 0 fs2 ds. Then M and N are (F⇧ )-martingales. Further,
for any T < 1,
Z t Z T
2
E[sup| f dW | ]  4E[ fs2 ds]. (3.3.19)
D
tT 0 0
Proof. The linearity (3.3.18) follows by linearity for the integral for simple functions ob-
served in Lemma 3.7 and then for general predictable processes via approximation. That
M , N are martingales has been observed in Lemma 3.10. The Growth inequality (3.3.19)
follows from (3.3.9).
R
Remark 3.14. For a bounded predictable process f , let IW (f ) = f dW . Then the Growth
inequality (3.3.19) and linearity of IW implies that for fn , f bounded predictable processes
bp ucp
fn ! f implies IW (fn ) ! IW (f ).
3.4. Multidimensional Ito Integral 81
Exercise 3.15. Let tni = i2 n, i 0, n 1 and let

1
X
fsn = Wtni 1(tni ,tni+1 ] (s).
i=0
Show that
RT
(i) E[ 0 |fsn Ws |2 ds] ! 0.
Rt Rt
(ii) 0 f n dW ! 0 W dW.
Rt
(iii) 0 W dW = 12 (Wt2 t).
Rt
Hint: For (iii) use 0 f n dW = Btn , (Ant Btn ) = Qnt along with (Ant + Btn ) = Wt2 (where
An , B n are as in (3.1.9) and (3.1.10)) and Qnt ! t (see Exercise 3.2). Thus Ant and Btn
converge as mentioned in Remark 3.4.
T
Rt Rt
Exercise 3.16. Let ft = t. Show that 0 f dW = tWt 0 Ws ds.
Exercise 3.17. Let A 2 V be a bounded r.c.l.l. adapted process with finite variation paths.
Show that Z t
A dW = At Wt
Z t
0
W dA.
F (3.3.20)
0
A
Hint: Let tni = i2 n, i 0, n 1. Observe that
1
X 1
X
Atni ^t (Wtni+1 ^t Wtni ^t ) = At Wt Wtni+1 ^t (Atni+1 ^t Atni ^t ).
R
i=0 i=0
Rt
The left hand side converges to 0 A dW while the second term on right hand side converges
Rt
to 0 W dA as seen in Exercise 2.77.
D
Remark 3.18. The Ito integral can be extended to a larger class of predictable integrands f
satisfying Z T
fs2 ds < 1 a.s. 8T < 1.
0
We will outline this later when we discuss integration w.r.t. semimartingales.
3.4 Multidimensional Ito Integral

Let W = (W 1 , W 2 , . . . , W d ) be d-dimensional Brownian motion, where W j is the j th com-
ponent. In other words, each W j is a real-valued Brownian motion and W 1 , W 2 , . . . , W d
are independent. Suppose further that (F⇧ ) is a filtration such that W is (F⇧ ) adapted and
for each s, {Wt Ws : t s} is independent of Fs (and hence (3.2.14) holds). Recall that
defining
Xd
✓
Xt = ✓j Wtj (3.4.1)
j=1
Mt✓ = (Xt✓ )2 t, (3.4.2)
8✓ 2 Rd with |✓| = 1; X ✓ , M ✓ are (F⇧ )-martingales. (3.4.3)
The argument given in the proof of next lemma is interesting and will be used later.
Throughout this section, the filtration (F⇧ ) will remain fixed.
Lemma 3.19. For j 6= k, W j W k is also a martingale.
T
Proof. Let Xt = p12 (Wtj + Wtk ). Then, as seen above X is a Brownian motion and hence
Xt2 t is a martingale. Note that
Xt2
1
2
1
F
t = [(Wtj )2 + (Wtk )2 + 2Wtj Wtk ] t
1
= [(Wtj )2 t] + [(Wtk )2 t] + Wtj Wtk .
A
2 2
Since the left hand side above as well as the first two terms of right hand side above are
martingales, it follows that so is the third term.
R
Suppose that for 1  j  m and 1  k  d, f jk are (F⇧ )-predictable processes that

satisfy (3.3.8). Let
d Z t
X
D
Xtj = f jk dW k .
k=1 0
Let X = (X 1 , . . . X m ) denote the m-dimensional process. It is natural to define Xt to be

Rt
0 f dX where we interpret f to be L(m, d) (m ⇥ d-matrix-valued)
Rt
predictable process. We
will obtain a growth estimate on the stochastic integral 0 f dW which in turn would be
crucial in the study of stochastic di↵erential equations. The following lemma is a first step
towards it.
Rt
Lemma 3.20. Let h be a predictable process satisfying (3.3.8). Let Ytk = 0 hdW k . Then
for j 6= k, Ytk Ytj is a martingale.
3.4. Multidimensional Ito Integral 83
Proof. Let Xt = p12 (Wtj + Wtk ). Then, as seen above X is a Brownian motion. For simple
functions f it is easy to check that
Z t Z t Z t
1
f dX = p ( f dW j + f dW k )
0 2 0 0
and hence for all f satisfying (3.3.8) via approximation. Thus,
Z t
1
hdX = p (Ytj + Ytk )
0 2
Rt R t 2
and so ( 0 hdX)2 0 hs ds is a martingale. Now as in the proof of Lemma 3.19
Z t Z t Z t
2 2 1 j 2 k 2 j k
( hdX) hs ds = [(Yt ) + (Yt ) + 2Yt Yt ] h2s ds
0 0 2 0
Z t Z t
1 1
= [(Ytj )2 h2s ds] + [(Ytk )2 h2s ds] + Ytj Ytk .
2 0 2 0
T
and once again the left hand side as well as the first two terms on the right hand side are
martingales and hence so is the last term completing the proof.
Rt
Lemma 3.21. Let f, g be predictable processes satisfying (3.3.8). Let Ytk = 0 f dW k ,
Rt
F
Ztk = 0 gdW k . Then for j 6= k, Ytk Ztj is a martingale.
Proof. Let Xt = Ytk Ztj . We will first prove that X is a martingale when f, g are simple, the
A
general case follows by approximation. The argument is similar to the proof of Theorem
3.8. By linearity, suffices to prove the required result in the following cases.
Case 1: 0  s < r and
R
ft = a1(s,r] (t), gt = b1(s,r] (t), a, b are Fs measurable, a 0, b 0.
Case 2: 0  s < r  u < v and

D
ft = a1(s,r] (t), gt = b1(u,v] (t), a is Fs measurable and b is Fu measurable.
In Case 1,
Z t Z t
Xt = Ytk Ztj = ab(Wr^t
k k
Ws^t j
)(Wr^t j
Ws^t )=( hdW k )( hdW j )
0 0
p
where h = (ab)1(s,r] (t) and hence by Lemma 3.20, X is a martingale.
In Case 2,
Xt = Ytk Ztj = ab(Wr^t
k k
Ws^t j
)(Wv^t j
Wu^t ).
Here, Xt = 0 for t  a and

j j
Xt = ⇠(Wv^t Wu^t )
k
with ⇠ = ab(Wr^t k ) is F measurable and hence by Theorem 2.57, X is a martingale.
Ws^t u
This proves the required result for simple predictable processes f, g. The general case
follows by approximating f, g by simple predictable processes {f n }, {g n } such that for all
T <1 Z T
[|fsn fs |2 + |gsn gs |2 ]ds ! 0.
0
Then it follows from (3.3.19) that for each t < 1,

Z t Z t
n k
f dW ! f dW k in L2 (P),
0 0
Z t Z t
g n dW j ! gdW j in L2 (P)
0 0
Rt Rt
and hence the martingale ( 0 f n dW k )( 0 g n dW j ) converges to
T
Rt Rt
Ytk Ztj = ( 0 f dW k )( 0 gdW j ) in L1 (P) and thus Ytk Ztj is a martingale.
We are now ready to prove the main growth inequality. Recall that qP L(d, m) denotes
the Euclidean norm on Rm and for a = (ajk ) 2 L(d, m), kak =

Euclidean norm on L(d, m).
d
the space of d ⇥ m matrices and for x = (x1 , x2 , . . . , xd ) 2 R , |x| =
qP Fd
j=1
d
Pm 2
2
j=1 xj denotes
k=1 ajk is the

A
Let f = (f jk ) be L(d, m)-valued process. For Rd -valued Brownian motion W , we have
R
seen that X = f dW is an Rm -valued process.
R
Theorem 3.22. Let W be an Rd -valued Brownian motion. Then for m ⇥ d-matrix-valued

predictable process f with
Z T
E[ kfs k2 ds] < 1
D
0
we have Z Z
t T
2
E[ sup | f dW | ]  4E[ kfs k2 ds]. (3.4.4)
0tT 0 0
Pd R
Proof. Let Xtj = k=1 f jk dW k . Then
d Z
X t d
X Z t Z t
(Xtj )2 jk 2
(f ) ds = [( f jk dW k )2 (f jk )2 ds]
k=1 0 k=1 0 0
d X
X d Z t Z t
jk k
+ 1{k6=l} f dW f jl dW l
l=1 k=1 0 0
3.5. Stochastic Di↵erential Equations 85
and each term on the right hand side above is a martingale and thus summing over j we
conclude Z t Z t
| f dW |2 kfs k2 ds
0 0
is a martingale. Thus Z Z
t t
E[| f dW |2 ] = E[ kfs k2 ds] (3.4.5)
0 0
Rt
and | 0 f dW |2 is a submartingale. The required estimate (3.4.4) now follows from Doob’s
maximal inequality (2.24) and (3.4.5).
3.5 Stochastic Di↵erential Equations

We are going to consider stochastic di↵erential equations indexstochastic di↵erential equa-
T
tions (SDE) of the type
dXt = (t, Xt )dWt + b(t, Xt )dt. (3.5.1)
The equation (3.5.1) is to be interpreted as an integral equation :
Xt = X0 +
Z t
(s, Xs )dWs +
0
Z t
F
b(s, Xs )ds.
Here W is an Rd -valued Brownian motion, X0 is a F0 measurable random variable, :

0
(3.5.2)
A
[0, 1) ⇥ Rm 7! L(m, d) and b : [0, 1) ⇥ Rm 7! Rm are given functions and one is seeking a
process X such that (3.5.2) is true. The solution X to the SDE (3.5.1), when it exists, is
called a di↵usion process with di↵usion coefficient ⇤ and drift coefficient b.
R
We are going to impose the following conditions on , b:

: [0, 1) ⇥ Rm 7! L(m, d) is a continuous function
(3.5.3)
b : [0, 1) ⇥ Rm 7! Rm is a continuous function
D
8T < 1 9CT < 1 such that for all t 2 [0, T ], x1 , x2 2 Rd

k (t, x1 ) (t, x2 )k  CT |x1 x2 |, (3.5.4)
1 2 1 2
|b(t, x ) b(t, x )|  CT |x x |.
Since t 7! (t, 0) and t 7! b(t, 0) are continuous and hence bounded on [0, T ] for every
T < 1, using the Lipschitz conditions (3.5.4), we can conclude that for each T < 1,
9KT < 1 such that
k (t, x)k  KT (1 + |x|),
(3.5.5)
|b(t, x)|  KT (1 + |x|).
We will need the following lemma, known as Gronwall’s lemma for proving uniqueness of
solution to (3.5.2) under the Lipschitz conditions.
Lemma 3.23. Let (t) be a bounded measurable function on [0, T ] satisfying, for some
0  a < 1, 0 < b < 1,
Z t
(t)  a + b (s) ds, 0  t  T. (3.5.6)
0
Then
(t)  aebt . (3.5.7)
Proof. Let
Z t
bt
g(t) = e (s) ds.
T
0
Then by definition, g is absolutely continuous and

Z t
0 bt bt
g (t) = e (t) be (s) ds a.e.
F 0
where almost everywhere refers to the Lebesgue measure on R. Using (3.5.6), it follows
that
A
g 0 (t)  ae bt
a.e.
Hence (using g(0) = 0 and that g is absolutely continuous) g(t)  ab (1 e bt ) from which
R
we get
Z t
a
(s) ds  (ebt 1).
0 b
The conclusion (t)  aebt follows immediately from (3.5.6).
D
So now let (F⇧ ) be a filtration on (⌦, F, P) and W be a d-dimensional Brownian motion

adapted to (F⇧ ) and such that for s < t, Wt Ws is independent of Fs . Without loss of
generality, let us assume that (⌦, F, P) is complete and that F0 contains all P null sets in
F.
Let Km denote the class of Rm -valued continuous (F· ) adapted process Z such that
RT
E[ 0 |Zs |2 ds] < 1 8T < 1. For Y 2 Km let
Z t Z t
⇠t = Y0 + (s, Ys )dWs + b(s, Ys )ds. (3.5.8)
0 0
Note that in view of the growth condition (3.5.5) the Ito integral above is defined. Using
the growth estimate (3.4.4) we see that
Z T
2 2
E[ sup |⇠t | ] =3[E[|Y0 | ] + 4E[ k (s, Ys )k2 ds]
0tT 0
Z T
+ E[( |b(s, Ys )|ds)2 ]]
0
Z T
2
3E[|Y0 | ] + 3KT2 (4 + T) (1 + E[|Ys |2 ])ds
0
and hence ⇠ 2 Km . Let us define a mapping ⇤ from Km into itself as follows: ⇤(Y ) = ⇠
where ⇠ is defined by (3.5.8). Thus solving the SDE (3.5.2) amounts to finding a fixed
point Z of the functional ⇤ with Z0 = X0 , where X0 is pre-specified. We are going to
prove that given X0 , there exists a unique solution (or a unique fixed point of ⇤) with the
T
given initial condition. The following lemma is an important step in that direction.
Lemma 3.24. Let Y, Z 2 Km and let ⇠ = ⇤(Y ) and ⌘ = ⇤(Z). Then for 0  t  T one
has Z t
2 2 2
E[ sup |⇠s ⌘s | ]  3E[|Y0 Z0 | ] + 3CT (4 + T )
0st
Proof. Let us note that

F
E[|Ys Zs |2 ]ds
0
A
Z t Z t
⇠t ⌘t = Y0 Z0 + [ (s, Ys ) (s, Zs )]dWs + [b(s, Ys ) b(s, Zs )]ds
0 0
and hence this time using the Lipschitz condition (3.5.4) along with the growth inequality
R
(3.4.4) we now have

Z t
E[ sup |⇠s ⌘s |2 ] 3[E[|Y0 Z0 |2 ] + 4E[ k (s, Ys ) (s, Zs )k2 ds]
0st 0
Z
D
t
+ E[( b(s, Zs )|ds)2 ]]
|b(s, Ys )
0
Z t
2 2
3E[|Y0 Z0 | ] + 3CT (4 + T ) E[|Ys Zs |2 ]ds.
0
Corollary 3.25. Suppose Y, Z 2 Km be such that Y0 = Z0 . Then for 0  t  T

Z t
2 2
E[ sup |⇤(Y )s ⇤(Z)s | ]  3CT (4 + T ) E[|Ys Zs |2 ]ds
0st 0
We are now in a position to prove the main result of this section.

Theorem 3.26. Suppose , b satisfy conditions (3.5.3) and (3.5.4) and X0 is a F0 mea-
surable Rm -valued random variable with E[|X0 |2 ] < 1. Then there exists a process X such
RT
that E[ 0 |Xs |2 ds] < 1 8T < 1 and
Z t Z t
Xt = X0 + (s, Xs )dWs + b(s, Xs )ds. (3.5.9)
0 0
RT
Further if X̃ is another process such that X̃0 = X0 , E[ 0 |X̃s |2 ds] < 1 for all T < 1 and
Z t Z t
X̃t = X̃0 + (s, X̃s )dWs + b(s, X̃s )ds
0 0
then X = X̃, i.e. P(Xt = Yt 8t) = 1.
Proof. Let us first prove uniqueness. Let X and X̃ be as in the statement of the theorem.
Then, using Lemma (3.24) it follows that
T
u(t) = E[ sup|Xs X̃s |2 ]
st
satisfies for 0  t  T (recalling X0 = X̃0 )

Z t
u(t)  3CT2 (4 + T )
Hence u is bounded and satisfies

F
Z
0
t
E[|Xs X̃s |2 ]ds.
A
u(t)  3CT2 (4 + T) u(s)ds, 0  t  T.
0
By (Gronwall’s) Lemma (3.23), it follows that u(t) = 0, 0  t  T for every T < 1. Hence
X = X̃.
R
We will now construct a solution. Let Xt1 = X0 for all t 0. Note that X 1 2 Km .
Now define X n inductively by
X n+1 = ⇤(X n ).
D
Since Xt1 = X0 for all t and X02 = X01 ,

Z t Z t
2 1
Xt Xt = (s, X0 )dWs + b(s, X0 )ds
0 0
and hence
E[sup|Xs2 Xs1 |2 ]  2KT2 (4 + T )(1 + E[|X0 |2 ])t. (3.5.10)
st
Note that X0n = X01 = X0 for all n 1 and hence from Lemma (3.24) it follows that for
n 2, for 0  t  T ,
Z t
E[sup|Xsn+1 Xsn |2 ]  3CT2 (4 + T ) E[|Xsn Xsn 1 2
| ]ds
st 0
Thus defining for n 1, un = E[supst |Xsn+1 Xsn |2 ] we have for n 2, for 0  t  T ,

Z t
2
un (t)  3CT (4 + T ) un 1 (s)ds. (3.5.11)
0
As seen in (3.5.10),
u1 (t)  2KT2 (4 + T )(1 + E[|X0 |2 ])t
and hence using (3.5.11), which is true for n 2, we can deduce by induction on n that
for a constant C̃T = 3(CT2 + KT2 )(4 + T )(1 + E[|X0 |2 ])
(C̃T )n tn
un (t)  , 0  t  T.
n!
P p
Thus n un (T ) < 1 for every T < 1 which is same as
T
1
X
ksup|Xsn+1 Xsn |k2 < 1 (3.5.12)
n=1 sT
kZk2 denoting the L2 (P) norm here. The relation (3.5.12) implies
k[
1
X
sup|Xsn+1
n=1 sT
F Xsn | ]k2 < 1 (3.5.13)
A
as well as
n+k
X
supk[sup|Xsn+k Xsn | ]k2  supk[ sup|Xsj+1 Xsj | ]k2
R
k 1 sT k 1 j=n sT

1
X (3.5.14)
[ ksup|Xsj+1 Xsj |k2 ]
j=n sT
D
! 0 as n tends to 1.
P1
Let N = [1 T =1 {! :
n+1 (!)
n=1 supsT |Xs Xsn (!)| = 1}. Then by (3.5.13) P(N ) = 0
and for ! 62 N , Xsn (!) converges uniformly on [0, T ] for every T < 1. So let us define X
as follows: 8
<lim n c
n!1 Xt (!) if ! 2 N
Xt (!) =
:0 if ! 2 N.
By definition, X is a continuous adapted process (since by assumption N 2 F0 ) and X n

converges to X uniformly in [0, T ] for every T almost surely. Using Fatou’s lemma and
(3.5.14) we get
n+k
X
k[sup|Xs Xsn | ]k2  lim inf k[ sup|Xsj+1 Xsj | ]k2
sT k!1
j=n sT
1
X (3.5.15)
[ ksup|Xsj+1 Xsj |k2 ]
j=n sT
In particular, X 2 Km . Since ⇤(X n ) = X n+1 by definition, (3.5.15) also implies that
lim k[sup|Xs ⇤(X n )s | ]k2 = 0 (3.5.16)

n!1 sT
while (3.5.15) and Corollary 3.25 (remembering that X0n = X0 for all n) imply that
lim k[sup|⇤(X)s ⇤(X n )s | ]k2 = 0. (3.5.17)
T
n!1 sT
From (3.5.16) and (3.5.17) it follows that X = ⇤(X) or that X is a solution to the SDE
(3.5.9).
F
A
R
D
Chapter 4
Stochastic Integration
In this chapter we will pose the question as to what processes X are good integrators: i.e.
Z t
T
JX (f )(t) = f dX
0
can be defined for a suitable class of integrands f and has some natural continuity prop-
erties. We will call such a process a Stochastic integrator. In this chapter, we will prove
F
Rt
basic properties of the stochastic integral 0 f dX for a stochastic integrator X.
In the rest of the book, (⌦, F, P) will denote a complete probability space and (F⇧ ) will
denote a filtration such that F0 contains all null sets in F. All notions such as adapted,
A
stop time, martingale will refer to this filtration unless otherwise stated explicitly.
For some of the auxiliary results, we need to consider the corresponding right continuous
filtration (F⇧+ ) = {Ft+ : t 0} where
R
Ft+ = \s>t Fs .
We begin with a discussion on the predictable -field.
D
4.1 The Predictable -Field

Recall our convention that a process X = (Xt ) is viewed as a function on ⌦ e = [0, 1) ⇥ ⌦
and the predictable -field P has been defined as the -field on ⌦ e generated by S. Here S
consists of simple adapted processes:
m
X
f (s) = a0 1{0} (s) + ak+1 1(sk ,sk+1 ] (s) (4.1.1)
k=0
where 0 = s0 < s1 < s2 < . . . < sm+1 < 1, ak is bounded Fsk 1 measurable random
variable, 1  k  (m + 1) and a0 is bounded F0 measurable. P measurable processes have
91
92 Chapter 4. Stochastic Integration
appeared naturally in the definition of the stochastic integral w.r.t. Brownian motion and
play a very significant role in the theory of stochastic integration with respect to general
semimartingales as we will see. A process f will be called a predictable process if it is P
measurable. Of course, P depends upon the underlying filtration and would refer to the
filtration that we have fixed. If there are more than one filtration under consideration, we
will state it explicitly. For example P(G· ) to denote the predictable -field corresponding
to a filtration (G· ) and S(G· ) to denote simple predictable process for the filtration (G· ).
The following proposition lists various facts about the -field P.
Proposition 4.1. Let (F⇧ ) be a filtration and P = P(F· ).
(i) Let f be P measurable. Then f is (F⇧ ) adapted. Moreover, for every t < 1, ft is
([s<t Fs )-measurable.
T
(ii) Let Y be a left continuous adapted process. Then Y is P measurable.
(iii) Let T be the class of all bounded adapted continuous processes. Then P = (T) and
F e P).
the smallest bp- closed class that contains T is B(⌦,
(iv) For any stop time ⌧ , U = 1[0,⌧ ] (i.e. Ut = 1[0,⌧ ] (t)) is P measurable.
A
(v) For an r.c.l.l. adapted process Z and a stop time ⌧ , the process X defined by
Xt = Z⌧ 1(⌧,1) (t) (4.1.2)

R
is predictable.
(vi) For a predictable process g and a stop time ⌧ , g⌧ is a random variable and h defined
D
by
ht = g⌧ 1(⌧,1) (t) (4.1.3)
is itself predictable.
Proof. It suffices to prove the assertions assuming that the processes f , Y , g are bounded
(by making a tan 1 transformation, if necessary). Now, for (i) let
e P) : ft is ([s<t Fs )- measurable}.
K1 = {f 2 B(⌦,
It is easily seen that K1 is bp-closed and contains S and thus by Theorem 2.64 equals
e P) proving (i).
B(⌦,
4.1. The Predictable -Field 93
For (ii), given a left continuous bounded adapted process Y , let Y n be defined by
n2 n
X
Ytn = Y0 1{0} (t) + Y k 1( kn , k+1
n ]
(t). (4.1.4)
2n 2 2
k=0
bp
Then Y n 2 S and Y n ! Y and this proves (ii).
For (iii), Let K2 be the smallest bp-closed class containing T. From part (ii) above, it
follows that T ✓ B(⌦,e P) and hence K2 ✓ B(⌦, e P). For t 2 [0, 1), n 1 let
n (t) = (1 nt)1[0, 1 ] (t),

n
n (t) = nt1(0, 1 ] (t) + 1( 1 ,1] (t) + (1 n(t 1))1(1,1+ 1 ] (t).

n n n
Then n and n are continuous functions, bounded by 1 and n bp

! 1{0} and n bp
! 1(0,1] .
For f 2 S given by
m
X
T
f (s) = a0 1{0} (s) + aj+1 1(sj ,sj+1 ] (s)
j=0
where 0 = s0 < s1 < s2 . . . < sm+1 < 1, aj+1 is bounded Fsj measurable random variable,
n n
Ys = a0 (s) +
Xm F
0  j  m, and a0 is bounded F0 measurable random variable let
s s
aj+1 n ( sj+1 jsj ).
j=0
A
bp
Then it follows that Y n 2 T and Y n ! Y . Thus S ✓ K2 and hence B(⌦, e P) ✓ K2
completing the proof of (iii).
For part (iv) note that U is adapted left continuous process and hence P measurable
R
by part (ii).
For (v), suffices to prove that X is adapted since X is left continuous by construction.
We have shown earlier (Lemma 2.36) that Z⌧ is F⌧ measurable and hence Da,t = {Z⌧ 
D
a} \ {⌧  t} belongs to Ft . Note that for a < 0

{Xt  a} = {Z⌧  a} \ {⌧ < t}
= Da,t \ {⌧ < t}
while for a 0,
{Xt  a} = (Da,t \ {⌧ < t}) [ {⌧ t}
and hence {Xt  a} 2 Ft for all a. This proves (v).
For (vi), the class of processes g for which (vi) is true is closed under bp convergence
and contains the class of continuous adapted processes as shown above. In view of part
(iii), this completes the proof.
If X is P(F⇧Y ) measurable, then part (i) of the result proven above says that for every
t, Xt is measurable w.r.t. (Yu : 0  u < t). Thus having observed Yu , u < t, the value Xt
can be known (predicted with certainty) even before observing Yt . This justifies the name
predictable -field for P.
Exercise 4.2. For t 0, let Gt = Ft+ . Show that for t > 0

([s<t Fs ) = ([s<t Gs ).
Here is an important observation regarding the predictable -field P(F⇧+ ) corresponding

to the filtration (F⇧+ ).
Theorem 4.3. Let f be a (F⇧+ )-predictable process (i.e. P(F⇧+ ) measurable). Then g
defined by
gt (!) = ft (!)1{(0,1)⇥⌦} (t, !) (4.1.5)
T
is a (F⇧ )-predictable process.
Proof. Let f a (F⇧+ )-adapted bounded continuous process. A crucial observation is that
F
then for t > 0, ft is Ft measurable and thus defining for n 1
hnt = (nt ^ 1)ft
bp
it follows thhat hn are (F⇧ ) adapted continuous processes and hn ! g where g is defined
A
by (4.1.5) and hence in this case g is (F⇧ ) predictable.
Now let H be the class of bounded P(F⇧+ ) measurable f for which the conclusion is
true. Then easy to see that H is an algebra that is bp-closed and contains all (F⇧+ )-adapted
R
continuous processes. The conclusion follows by the monotone class theorem, Theorem
2.64.
D
The following is an immediate consequence of this.
Corollary 4.4. Let f be a process (F⇧+ )-predictable such that f0 is F0 measurable. Then
f is (F⇧ )-predictable.
Proof. Since f0 is F0 measurable, ht = f0 1{0} (t) is (F⇧ )-predictable and f = g + h where g

is the (F⇧ )-predictable process given by (4.1.5). Hence f is (F⇧ )-predictable.
Corollary 4.5. Let A ✓ (0, 1) ⇥ ⌦. Then A 2 P(F⇧ ) if and only if A 2 P(F⇧+ ).
The following example will show that the result may not be true if f0 = 0 is dropped
in the Corollary 4.4 above.
4.2. Stochastic Integrators 95
Exercise 4.6. Let ⌦ = C([0, 1) and let Xt denote the coordinate process and Ft = (Xs :
0  s  t). Let A be the set of all ! 2 ⌦ that take positive as well as negative values in
(0, ✏) for every ✏ > 0. Show that A 2 F0+ but A does not belong to F0 . Use this to show the
relevance of the hypothesis on f0 in the Corollary given above.
Exercise 4.7. Let ⇠ be an F⌧ measurable random variable. Show that Y = ⇠ 1(⌧,1) is

predictable.
Hint: Use Lemma 2.39 along with part (v) in Proposition 4.1.
4.2 Stochastic Integrators

Let us fix an r.c.l.l. (F⇧ ) adapted stochastic process X.
Recall, S consists of the class of processes f of the form
T
m
X
f (s) = a0 1{0} (s) + aj+1 1(sj ,sj+1 ] (s) (4.2.1)
j=0
where 0 = s0 < s1 < s2 < . . . < sm+1 < 1, aj is bounded Fsj 1 measurable random
by
F
variable, 1  j  (m + 1), and a0 is bounded F0 measurable.
For a simple predictable f 2 S given by (4.2.1), let JX (f ) be the r.c.l.l. process defined
A
m
X
JX (f )(t) = a0 X0 + aj+1 (Xsj+1 ^t Xsj ^t ). (4.2.2)
j=0
One needs to verify that JX is unambiguously defined on S. i.e. if a given f has two
R
representations of type (4.2.1), then the corresponding expression in (4.2.2) agree. This as
well as linearity of JX (f ) for f 2 S can be verified using elementary algebra. By definition,
for f 2 S, JX (f ) is an r.c.l.l. adapted process. In analogy with the Ito integral with respect
D
to Brownian motion discussed in the earlier chapter, we wish to explore if we can extend JX
to the smallest bp-closed class of integrands that contain S. Each f 2 S can be viewed as a
real valued function on ⌦ e = [0, 1) ⇥ ⌦. Since P is the -field generated by S, by Theorem
2.64, the smallest class of functions that contains S and is closed under bp-convergence is
e P).
B(⌦,
When the space, filtration and the probability measure are clear from the context, we
will write the class of adapted r.c.l.l. processes R0 (⌦, (F⇧ ), P) simply as R0 .
Definition 4.8. An r.c.l.l. adapted process X is said to be a Stochastic integrator if the map-
e P) 7! R0 (⌦, (F⇧ ), P) satisfying
ping JX from S to R0 (⌦, (F⇧ ), P) has an extension JX : B(⌦,
the following continuity property:

bp ucp
f n ! f implies JX (f n ) ! JX (f ). (4.2.3)
It should be noted that for a given r.c.l.l. process X, JX may not be continuous on S.
See the next Exercise. So this definition , in particular, requires that JX is continuous on
S and has a continuous extension to B(⌦,e P). Though not easy to prove, continuity of JX
on S does imply that it has a continuous extension and hence it is a stochastic integrator.
We will see this later in Section 5.8.
Exercise 4.9. Let G be a real valued function from [0, 1) with G(0) = 0 that does not
have bounded variation. So for some T < 1, Var[0,T ] (G) = 1. We will show that JG is not
continuous on S. From the definition of Var[0,T ] (G), it follows that we can get a sequence of
partitions of [0, T ]
T
0 = tm m m
0 < t1 < . . . < tnm = T (4.2.4)
such that
Let sgn : R !
↵m = (
nX
m 1
j=0
7 R be defined by sgn(x) = 1 for x

|G(tm F
j ) G(tm
j 1 )| ) ! 1.
0 and sgn(x) =
(4.2.5)
1 for x < 0. Let

A
1
m m m
f = (↵m ) 2 sgn(G(tj ) G(tj 1 ))1(tm m . Show that
j 1 ,tj ]
(i) f m converges to 0 uniformly.

R
(ii) JG (f m ) converges to 1.
Conclude that JG is not continuous on S.

D
We next observe that the extension, when it exists is unique.
0 from
Theorem 4.10. Let X be an r.c.l.l. process. Suppose there exist mappings JX , JX
e P)into R0 (⌦, (F⇧ ), P), such that for f 2 S (given by (4.2.1)),
B(⌦,
m
X
0
JX (f )(t) = JX (f )(t) = a0 X0 + aj+1 (Xsj+1 ^t Xsj ^t ). (4.2.6)
j=1
0 satisfy (4.2.3). Then
Further suppose that both JX , JX
0
P[JX (f )(t) = JX e P).
(f )(t) 8t] = 1 8f 2 B(⌦,
0 both satisfy (4.2.3), the class

Proof. Since JX , JX
e P) : P(JX (f )(t) = J 0 (f )(t) 8t) = 1}
K1 = {f 2 B(⌦, X
is bp-closed and by our assumption (4.2.6), contains S. Since P = (S), by Theorem 2.64
e P).
it follows that K1 = B(⌦,
The following result which is almost obvious in this treatment of stochastic integration
is a deep result in the traditional approach to stochastic integration and is known as
Stricker’s theorem.
Theorem 4.11. Let X be a stochastic integrator for the filtration (F⇧ ). Let (G⇧ ) be a
filtration such that Ft ✓ Gt for all t. Suppose X is a stochastic integrator for the filtration
(G⇧ ) as well. Denoting the mapping defined by (4.2.2) for the filtration (G⇧ ) and its extension
T
by HX , we have
e P(F⇧ )).
JX (f ) = HX (f ) 8f 2 B(⌦, (4.2.7)
Proof. Let JX0 be the restriction of H e 0

X to B(⌦, P(F⇧ )). Then JX satisfies (4.2.6) as well
F
as (4.2.3). Thus (4.2.7) follows from uniqueness of extension, Theorem 4.10.
Here is an observation that plays an important role in next result.

A
Lemma 4.12. Let X be a stochastic integrator and ⇠ be a F0 measurable bounded random
e P)
variable. Then 8f 2 B(⌦,
R
JX (⇠f ) = ⇠JX (f ). (4.2.8)
e P) such that (4.2.8) is true. Easy to verify that

Proof. Let K2 consist of all f 2 B(⌦,
e P) by Theorem 2.64.
S ✓ K2 and that K2 is bp-closed. Thus, K2 = B(⌦,
D
The next observation is about the role of P-null sets.
e P),
Theorem 4.13. Let X be a stochastic integrator. Then f, g 2 B(⌦,
P(! 2 ⌦ : ft (!) = gt (!) 8t 0) = 1 (4.2.9)
implies
P(! 2 ⌦ : JX (f )t (!) = JX (g)t (!) 8t 0) = 1. (4.2.10)
In other words, the mapping JX maps equivalence classes of process under the relation
f = g (see Definition (2.2)) to equivalence class of processes.
Proof. Given f, g such that (4.2.9) holds, let
⌦0 = {! 2 ⌦ : ft (!) = gt (!) 8t 0}.
Then the assumption that F0 contains all P-null sets implies that ⌦0 2 F0 and thus ⇠ = 1⌦0
is F0 measurable and ⇠f = ⇠g in the sense that these are identical processes:
⇠(!)ft (!) = ⇠(!)gt (!) 8! 2 ⌦, t 0.
Now we have
⇠JX (f ) = JX (⇠f )
= JX (⇠g)
= ⇠JX (g).
Since P(⇠ = 1) = 1, (4.2.10) follows.
T
Corollary 4.14. Let fn , f be bounded predictable be such that there exists ⌦0 ✓ ⌦ with
P(⌦0 ) = 1 and such that
Then
F
bp
1⌦0 fn ! 1⌦0 f.
ucp
A
JX (fn ) ! JX (f ).
Remark 4.15. Equivalent Probability Measures : Let Q be a probability measure equivalent

to P. In other words, for A 2 F,
R
Q(A) = 0 if and only if P(A) = 0.
Then it is well known and easy to see that (for a sequence of random variables) convergence
D
in P probability implies and is implied by convergence in Q probability. Thus, it follows that an

r.c.l.l. adapted process X is a stochastic integrator on (⌦, F, P) if and only if it is a stochastic
integrator on (⌦, F, Q). Moreover, the class L(X) under the two measures is the same and for
R
f 2 L(X), the stochastic integral f dX on the two spaces is identical.
We have thus seen that the stochastic integrator does not quite depend upon the under-
lying probability measure. We have also seen that it does not depend upon the underlying
filtration either - see Theorem 4.11.
R
For a stochastic integrator X, we will be defining the stochastic integral Y = f dX,
for an appropriate class of integrands, given as follows:
Definition 4.16. For a stochastic integrator X, let L(X) denote the class of predictable
processes f such that
ucp
e P), hn ! 0 pointwise, |hn |  |f | ) JX (hn )
hn 2 B(⌦, ! 0. (4.2.11)
From the definition, it follows that if f 2 L(X) and g is predictable such that |g|  |f |,
then g 2 L(X). Here is an interesting consequence of this definition.
Theorem 4.17. Let X be a stochastic integrator. Then f 2 L(X) if and only if

e P), g n ! g pointwise , |g n |  |f | ) JX (g n ) is Cauchy in ducp .
g n 2 B(⌦, (4.2.12)
Proof. Suppose f satisfies (4.2.11). Let

e P), g n ! g pointwise , |g n |  |f |.
g n 2 B(⌦,
T
Given any subsequences {mk }, {nk } of integers, increasing to 1, let
1 k k
hk = (g m g n ).
2
ucp
Then {hk } satisfies (4.2.11) and hence JX (hk )
k
(JX (g m )
F ! 0 and as a consequence
k
JX (g n ))
ucp
! 0. (4.2.13)
Since (4.2.13) holds for all subsequences {mk }, {nk } of integers, increasing to 1, it follows
A
that JX (g n ) is Cauchy. Conversely, suppose f satisfies (4.2.12). Given {hn } as in (4.2.11),
let a sequence g k be defined as g 2k = hk and g 2k 1 = 0 for k 1. Then g k converges
to g = 0 and hence JX (g k ) is Cauchy. Since for odd integers n, JX (g n ) = 0 and thus
R
JX (g 2k ) = JX (hk ) converges to 0.
R
This result enables us to define f dX for f 2 L(X).
D
Definition 4.18. Let X be a stochastic integrator and let f 2 L(X). Then

Z
f dX = lim JX (f 1{|f |n} ) (4.2.14)
n!1
where the limit is in the ducp metric.
Exercise 4.19. Let an ! 1. Show that for f 2 L(X),

Z
ucp
JX (f 1{|f |an } ) ! f dX.
R
When f is bounded, it follows that f dX = JX (f ) by definition. Here is an important
result which is essentially a version of dominated convergence theorem.
e P) be such that g n ! g pointwise, |g n |  |f |.

Theorem 4.20. Let f 2 L(X) and g n 2 B(⌦,
Then Z Z
n
g dX ! gdX in ducp metric as n ! 1.
Proof. For n 1, let ⇠ 2n 1 = g 1{|g|n} and ⇠ 2n = g n . Then |⇠ m |  |f | and ⇠ m converges

R
pointwise to g. Thus, ⇠ m dX is Cauchy in ducp metric. On the other hand
Z Z
2n 1 ucp
⇠ dX ! gdX
R
from the definition of gdX. Thus
Z Z Z
2n n ucp
⇠ dX = g dX ! gdX.
Note that in the result given above, we did not require g to be bounded. Even if g were
T
bounded, the convergence was not required to be bounded pointwise.
R
The process f dX is called the stochastic integral of f with respect to X and we will
also write Z Z
Rt
( F
f dX)t =
0
t
f dX.
We interpret 0 f dX as the definite integral of f with respect to X over the interval [0, t].
A
We sometime need the integral of f w.r.t. X over (0, t] and so we introduce
Z t Z t Z t
f dX = f 1(0,1) dX = f dX f0 X0 .
0+ 0 0
R Rt
R
Note that f dX is an r.c.l.l. process by definition. We will also write 0 f dX to denote

Rs
Yt where Ys = 0 f dX.
A simple example of a Stochastic Integrator is an r.c.l.l. adapted process X such that
D
the mapping t 7! Xt (!) satisfies Var[0,T ] (X· (!)) < 1 for all ! 2 ⌦, for all T < 1.
Theorem 4.21. Let X 2 V be a process with finite variation paths, i.e. X be an r.c.l.l.
adapted process such that
Var[0,T ] (X· (!)) < 1 for all T < 1. (4.2.15)
Then X is a stochastic integrator. Further, for f 2 B(⌦, e P) the stochastic integral JX (f ) =
R
f dX is the Lebesgue-Stieltjes integral for every ! 2 ⌦:
Z t
JX (f )(t)(!) = f (s, !)dXs (!) (4.2.16)
0
where the integral above is the Lebesgue-Stieltjes integral.
4.3. Properties of the Stochastic Integral 101
Proof. For f 2 S, the right hand side of (4.2.16) agrees with the specification in (4.2.1)-
(4.2.2). Further the dominated convergence theorem (for Lebesgue-Stieltjes integral) im-
plies that the right hand side of (4.2.16) satisfies (4.2.3) and thus X is a stochastic integrator
and (4.2.16) is true.
As seen in Remark 3.14, Brownian motion W is also a stochastic integrator.
Remark 4.22. If X 2 V and At = |X|t is the total variation of X on [0, t] and f is predictable
such that Z t
|fs |dAs < 1 8t < 1 a.s. (4.2.17)
0
then f 2 L(X) and the stochastic integral is the same as the Lebesgue-Stieltjes integral. This
follows from the dominated convergence theorem and Theorem 4.21. However, L(X) may
include processes f that may not satisfy (4.2.17). We will return to this later.
T
Remark 4.23. Suppose X is an r.c.l.l. adapted such that
ucp
f n ! 0 uniformly ) JX (f n ) ! 0. (4.2.18)
F
Of course every stochastic integrator satisfies this property. Let S1 denote the class of f 2 S
(simple functions) that are bounded by 1. For T < 1 the family of random variables
Z T
A
{ f dX : f 2 S1 } (4.2.19)
0
is bounded in probability or tight in the sense that
Z T
R
8" > 0 9 M < 1 such that sup P(| f dX| M )  ". (4.2.20)
f 2S1 0
To see this, suppose (4.2.18) is true but (4.2.20) is not true. Then we can get an " > 0 and
for each m 1, f m 2 S with |f m |  1 such that
D
Z T
P(| f m dX| m) ". (4.2.21)
0
1 m
RT
Writing g m = mf , it follows that g m ! 0 uniformly but in view of (4.2.21), 0 g m dX does
not converge to zero in probability- which contradicts (4.2.18). Indeed, the apparently waeker
property (4.2.18) characterises stochastic integrators as we will see later. See Theorem 5.78.
4.3 Properties of the Stochastic Integral

R
First we note linearity of (f, X) 7! f dX.
Theorem 4.24. Let X, Y be stochastic integrators, f, g be predictable processes and ↵, 2

R.
(i) Suppose f, g 2 L(X). Let h = ↵f + g. Then (f + g) 2 L(X) and

Z Z Z
hdX = ↵ f dX + gdX. (4.3.1)
(ii) Let Z = ↵X + Y. Then Z is a stochastic integrator. Further, if f 2 L(X) and

f 2 L(Y ). then f 2 L(Z) and
Z Z Z
f dZ = ↵ f dX + f dY. (4.3.2)
Proof. We will begin by showing that (4.3.1) is true for f, g bounded predictable processes.
For a bounded predictable process f , let
Z Z Z
T
e
K(f ) = {g 2 B(⌦, P) : (↵f + g)dX = ↵ f dX + gdX, 8↵, 2 R}.
If f 2 S, it easy to see that S ✓ K(f ) and Theorem 4.20 implies that K(f ) is bp-closed.
e P).
Hence invoking Theorem 2.64, it follows that K(f ) = B(⌦,
Now we take f 2 B(⌦, F
e P) and the part proven above yields S ✓ K(f ). Once again,
e P). Thus (4.3.1) is true when
using that K(f ) is bp-closed we conclude that K(f ) = B(⌦,
A
f, g are bounded predictable process.
Now let us fix f, g 2 L(X). We will show (|↵f | + | g|) 2 L(X), let un be bounded
predictable processes converging to u pointwise and
R
|un |  (|↵f | + | g|); 8n 1.
Let v n = un 1{|↵f || g|} and wn = un 1{|↵f |>| g|} . Then v n and wn converge pointwise to
v = u1{|↵f || g|} and w = u1{|↵f |>| g|} respectively and further
D
|v n |  2| g|
|wn |  2|↵f |.
Note that since v n , wn are bounded and un = v n + wn , from the part proven above, we
have Z Z Z
v n dX + wn dX = un dX.
R R
Since f, g 2 L(X), it follows that v n dX and wn dX are Cauchy in ducp metric and hence
R
so is their sum un dX. Thus (|↵f |+| g|) 2 L(X) and as a consequence, (↵f + g) 2 L(X)
as well.
Now let
f n = f 1{|f |n} , g n = g 1{|g|n} .
R R R R
Then by definition, f n dX converges to f dX and g n dX converges to gdX in ducp
metric. Also (↵f n + g n ) are bounded predictable processes, converge pointwise to (↵f + g)
and is dominated by (|↵f | + | g|) 2 L(X). Hence by Theorem 4.20 we have
Z Z
n n ucp
(↵f + g )dX ! (↵f + g)dX.
On the other hand, the validity of (4.3.1) for bounded predictable processes yields
Z Z Z
(↵f n + g n )dX = ↵f n dX + g n dX
Z Z
= ↵ f n dX + g n dX
Z Z
T
ucp
! ↵ f dX + gdX.
This completes proof of (i).

For (ii), we begin by noting that (4.3.2) is true when f is simple i.e.
F
JZ (f ) = ↵JX (f ) + JY (f ) f 2 S.
Since JX , JY have a continuous extension to B(⌦,e P), it follows that so does JZ and hence
A
Z is also a stochastic integrator and thus (4.3.2) is true for bounded predictable processes.
Now if f 2 L(X) and f 2 L(Y ) and g n 2 B(⌦, e P), converge pointwise to g, g n is
R n R n
dominated by |f |, then ↵ g dX and g dY are Cauchy in ducp metric and hence so
R n R
R
is their sum, which equals g d(↵X + Y ) = g n dZ. Thus f 2 L(Z). The equation
(4.3.2) follows by using (4.3.2) for the bounded process f n = f 1{|f |n} and passing to the
limit.
D
Thus the class of stochastic integrators is a linear space. We will see later that it is
R
indeed an Algebra. Let us note that when X is a continuous process, then so is f dX.
Theorem 4.25. Let X be a continuous process and further X be a stochastic integrator.

R
Then for f 2 L(X), f dX is also a continuous process.
Proof. Let Z
e
K = {f 2 B(⌦, P) : f dX is a continuous process}.
R
By using the definition of f dX it is easy to see that S ✓ K. Also that K is bp-closed
ucp
since Z n continuous, Z n ! Z implies Z is also continuous. Hence invoking Theorem 2.64
we conclude K = B(⌦, e P). The general case follows by noting that limit in ducp metric of
R
continuous process is a continuous process and using that for f 2 L(X), f dX is the limit
R
in ducp -metric of f 1{|f |n} dX.
We can now prove :
Theorem 4.26. Dominated Convergence Theorem for the Stochastic Integral

Let X be a stochastic integrator. Suppose hn , h are predictable processes such that
h
hnt (!) !t (!) 8t 0, 8! 2 ⌦ (4.3.3)
and there exists f 2 L(X) such that
|hn |  |f | 8n. (4.3.4)
Then Z Z
n ucp
h dX ! hdX. (4.3.5)
T
Proof. Let g n = hn 1{|hn |n} and f n = hn 1{|hn |>n}
Note that in view of (4.3.4) and the assumption f 2 L(X) it follows that hn 2 L(X).
R R F
Pointwise convergence of hn to h also implies |h|  |f | which in turn yields h 2 L(X).
Thus hn dX, hdX are defined. Clearly, g n ! h pointwise and also f n ! 0 pointwise.
Further, hn = g n + f n , |g n |  |f | and |f n |  |f |.
R ucp R
A
From Theorem 4.20 it follows that g n dX ! hdX and from the definition of L(X),
R ucp
it follows that f n dX ! 0. Now linearity of the stochastic integral, Theorem 4.24, shows
that (4.3.5) is true.
R
Remark 4.27. The condition (4.3.3) that hn ! h pointwise can be replaced by requiring
that convergence holds pointwise outside a null set, namely that there exists ⌦0 ✓ ⌦ with
P(⌦0 ) = 1 such that
D
hnt (!) ! ht (!) 8t 0, 8! 2 ⌦0 . (4.3.6)

See Theorem 4.13 and Corollary 4.14.
It should be noted that the hypothesis in the dominated convergence theorem given
above are exactly the same as in the case of Lebesgue integrals.
Recall, for an r.c.l.l. process X, X denotes the l.c.r.l. process defined by Xt = X(t ),
i.e. the left limit at t with the convention X(0 ) = 0 and X = X X . Note that
( X)t = 0 at each continuity point and equals the jump otherwise. Note that by the above
convention
( X)0 = X0 .
The next result connects the jumps of the stochastic integral with the jumps of the inte-
grator.
Theorem 4.28. Let X be a stochastic integrator and let f 2 L(X). Then we have
Z
( f dX) = f · ( X). (4.3.7)
Proof. For f 2 S, (4.3.7) can be verified from the definition. Now the class K of f such that
(4.3.7) is true can be seen to be bp-closed and hence is the class of all bounded predictable
processes. The case of general f 2 L(X) can be completed as in the proof of Theorem
4.25.
Rt
The equation (4.3.7) is to be interpreted as follows: if Yt = 0 f dX then ( Y )t =
ft ( X)t .
T
We have already seen that the class of stochastic integrators (with respect to a filtration
on a given probability space) is a linear space.
R
Theorem 4.29. Let X be a stochastic integrator and let f 2 L(X). Let Y = f dX. Then
Z t
0
gdY =
Z tF
Y is also a stochastic integrator and for a bounded predictable process g,
gf dX, 8t.
0
(4.3.8)
A
Further, for a predictable process g, g 2 L(Y ) if and only if gf 2 L(X) and then (4.3.8)
holds.
Proof. Let us first assume that f, g 2 S are given by

R
m
X
f (s) = a0 1{0} (s) + aj+1 1(sj ,sj+1 ] (s) (4.3.9)
j=0
D
n
X
g(s) = b0 1{0} (s) + bj+1 1(tj ,tj+1 ] (s) (4.3.10)
j=0
where a0 and b0 are bounded F0 measurable random variables, 0 = s0 < s1 < s2 < . . . , <
sm+1 < 1, 0 = t0 < t1 < t2 < . . . , < tn+1 < 1; aj+1 is bounded Fsj measurable random
variable, 0  j  m and bj+1 is bounded Ftj measurable random variable, 0  j  n . Let
us put
A = {sj : 0  j  (m + 1)} [ {tj : 0  j  (n + 1)}.
Let us enumerate the set A as
A = {ri : 0  i  k}
where 0 = r0 < r1 < . . . < rk+1 . Note k may be smaller than m + n as there could be
repetitions. We can then represent f, g as
k
X
f (s) = c0 1{0} (s) + cj+1 1(rj ,rj+1 ] (s) (4.3.11)
j=0
k
X
g(s) = d0 1{0} (s) + dj+1 1(rj ,rj+1 ] (s) (4.3.12)
j=0
where cj+1 , dj+1 are bounded Frj measurable. Then

k
X
(gf )(s) = d0 c0 1{0} (s) + dj+1 cj+1 1(rj ,rj+1 ] (s)
j=0
and hence
Z
T
t k
X
(gf )dX = d0 c0 X0 + dj+1 cj+1 (Xrj+1 ^t Xrj ^t ). (4.3.13)
0 j=0
Pk
Also, Y0 = c0 X0 and Yt = c0 X0 + j=0 cj+1 (Xrj+1 ^t Xrj ^t ) and hence
(Yrj+1 ^t
Thus, using (4.3.13)-(4.3.14), one gets

F
Yrj ^t ) = cj+1 (Xrj+1 ^t Xrj ^t ) (4.3.14)
A
Z t k
X
(gf )dX = d0 Y0 + dj+1 (Yrj+1 ^t Yrj ^t ) (4.3.15)
0 j=0
R
where Z t
Yt = f dX. (4.3.16)
0
R
The right hand side in (4.3.15) is gdY and thus in view of (4.3.10) we also have
D
Z t n
X
(gf )dX = b0 Y0 + bj+1 (Ytj+1 ^t Ytj ^t ) (4.3.17)
0 j=0
or in other words,
Z t n
X Z tj+1 ^t Z tj ^t
(gf )dX = b0 Y0 + bj+1 ( f dX f dX). (4.3.18)
0 j=0 0 0
Thus the result is proven when both f, g 2 S. Now fix g 2 S. Note that this fixes n as well.
Let
e P) : (4.3.18) holds}.
K = {f 2 B(⌦,
We have seen that S ✓ K. Easy to see using Theorem 4.26 (dominated convergence
e P). Thus, for all
theorem) that K is bp- closed and since it contains S, it equals B(⌦,
bounded predictable f , (4.3.18) is true.
If f 2 L(X), then approximating f by f n = f 1{|f |n} , using (4.3.18) for f n and taking
limits, we conclude (invoking dominated convergence theorem, which is justified as g is
bounded) that (4.3.18) is true for g 2 S and f 2 L(X).
Now fix f 2 L(X) and let Y be given by (4.3.16). Note that right hand side in (4.3.18)
is JY (g)(t), as defined by (4.2.1)-(4.2.2), so that we have
Z t
(gf )dX = JY (g)(t), 8g 2 S. (4.3.19)
0
Rt
Let us define J(g) = 0 gf dX for bounded predictable g, then J is an extension of
bp ucp
JY as noted above. The Theorem 4.26 again yields that if g n ! g then J(g n ) ! J(g).
T
Thus, J is the extension of JY as required in the definition of stochastic integrator. Thus
Y is a stochastic integrator and (4.3.8) holds (for bounded predictable g).
Now suppose g is predictable such that f g 2 L(X). We will prove that g 2 L(Y ) and
that (4.3.8) holds for such a g. F
To prove g 2 L(Y ), let hk be bounded predictable, converging pointwise to h such that
R
hk are dominated by g. We need to show that hk dY is Cauchy in ducp metric.
A
Let uk = hk f . Then uk are dominated by f g 2 L(X) and converge pointwise to hf .
R R
Thus, Z k = uk dX converges to Z = hf dX and hence is Cauchy in ducp metric. On the
R
other hand, since hk is bounded, invoking (4.3.8) for hk , we conclude hk dY = Z k and
R
hence is Cauchy in ducp metric. This shows g 2 L(Y ). Further, taking h = g, hk = g 1{|g|k}
R R R
above we conclude that the limit of hk dY is gdY which in turn equals hf dX as noted
above. This also shows that (4.3.8) is true when f g 2 L(X) and g 2 L(Y ).
D
To complete the proof, we need to show that if g 2 L(Y ) then f g 2 L(X). For this,
suppose un are bounded predictable, |un |  |f g| and un converges to 0 pointwise. Need to
R ucp
show un dX ! 0. Let
8
< 1 if fs (!) 6= 0
˜
fs (!) = fs (!)
:0 if f (!) = 0.
s
and v n = un f˜. Now v n are predictable, are dominated by |g| and v n converges pointwise
to 0. Thus, Z
ucp
v n dY ! 0.
Since |un |  |f g|, it follows that v n f = un and thus v n f is bounded and hence in L(X).
Thus by the part proven above, invoking (4.3.8) for v n we have
Z Z Z
v dY = v f dX = un dX.
n n
R ucp
This shows un dX ! 0. Hence f g 2 L(X). This completes the proof.
We had seen in Theorem 4.3 that the class of predictable processes is essentially the
same for the filtrations F⇧ and F⇧+ - the only di↵erence being at t = 0.
We now observe :
Theorem 4.30. For an r.c.l.l. F⇧ adapted process X, it is a stochastic integrator w.r.t. the
filtration (F⇧ ) if and only if it is a stochastic integrator w.r.t. the filtration (F⇧+ ).
T
R
Proof. Let X be a stochastic integrator w.r.t. the filtration (F⇧ ), so that hdX is defined
for bounded (F⇧ ) predictable processes h. Given a bounded (F⇧+ )-predictable processes f ,
let g be defined by
F
gt (!) = ft (!)1{(0,1)⇥⌦} (t, !).
A
Then by Theorem 4.3, g is a bounded (F⇧ ) predictable processes. So we define
Z
JX (f ) = gdX + f0 X0 .
R
It is easy to check that JX satisfies the required properties for X to be a Stochastic

integrator.
R
Conversely if X is a stochastic integrator w.r.t. the filtration (F⇧+ ), so that hdX is
defined for bounded (F⇧+ )-predictable processes h, of course for a bounded (F⇧ ) predictable
D
R
f we can define by JX (f ) = f dX and JX will have the required continuity properties.
However, we need to check that JX (f ) so defined is (F⇧ ) adapted or in other words, belongs
to R0 (⌦, (F⇧ ), P). For f 2 S, it is clear that JX (f ) 2 R0 (⌦, (F⇧ ), P) since X is (F⇧ ) adapted.
Since the space R0 (⌦, (F⇧ ), P) is a closed subspace of R0 (⌦, (F⇧+ ), P) in the ducp metric,
it follows that JX (f ) 2 R0 (⌦, (F⇧ ), P) for f 2 B(⌦, e P(F⇧ )) and thus X is a stochastic
integrator for the filtration (F⇧ ).
Exercise 4.31. Let X be a (F⇧ )- stochastic integrator. For each t let {Gt : t 0} be a
+
filtration such that for all t, Ft ✓ Gt ✓ Ft . Show that X is a (G⇧ )- stochastic integrator.
4.4. Locally Bounded Processes 109
4.4 Locally Bounded Processes

We will introduce an important class of integrands, namely that of locally bounded pre-
dictable processes, that is contained in L(X) for every stochastic integrator X. For a stop
e : 0  t  ⌧ (!)} and thus g = f 1[0,⌧ ] means
time ⌧ , [0, ⌧ ] will denote the set {(t, !) 2 ⌦
the following: gt (!) = ft (!) if t  ⌧ (!) and gt (!) is zero if t > ⌧ (!).
The next result gives interplay between stop times and stochastic integration.
Lemma 4.32. Let X be a stochastic integrator and f 2 L(X). Let ⌧ be a stop time. Let
g = f 1[0,⌧ ] . Let
Z t
Yt = f dX (4.4.1)
0
R
and V = gdX. Then Vt = Yt^⌧ , i.e.
Z t
T
Yt^⌧ = f 1[0,⌧ ] dX. (4.4.2)
0
Proof. When f 2 S is a simple predictable process and ⌧ is a stop time taking only finitely
many values, then g 2 S and (4.4.1) - (4.4.2) can be checked as in that case, the integrals
R R
F
f dX and gdX are both defined directly by (4.2.2). Thus fix f 2 S. Approximating a
bounded stop time ⌧ from above by stop time taking finitely many values (as seen in the
A
proof of Theorem 2.52), it follows that (4.4.2) is true for any bounded stop time, then any
stop time ⌧ can be approximated by ⌧ñ = ⌧ ^ n and one can check that (4.4.2) continues
to be true. Thus we have proven the result for simple integrands.
Now fix a stop time ⌧ and let
R
e P) : (4.4.1)
K = {f 2 B(⌦, (4.4.2) is true for all t 0.}.
Then it is easy to see that K is closed under bp-convergence and as noted above it contains
D
S. Hence by Theorem 2.64, it follows that K = B(⌦, e P). Finally, for a general f 2 L(X),
the result follows by approximating f by f n = f 1{|f |n} and using dominated convergence
theorem. This completes the proof.
Exercise 4.33. In the proof given above, we first proved the required result for f 2 S and
any stop time ⌧ . Complete the proof by first fixing a simple stop time ⌧ and prove it for all
f 2 L(X) and subsequently prove it for all stop times ⌧ .
R t^⌧
Remark 4.34. We can denote Yt^⌧ as 0 f dX so that (4.4.2) can be recast as
Z t^⌧ Z t
f dX = f 1[0,⌧ ] dX. (4.4.3)
0 0
Corollary 4.35. If X is a stochastic integrator and f, g 2 L(X) and ⌧ is a stop time

such that
f 1[0,⌧ ] = g 1[0,⌧ ]
then for each t Z Z

t^⌧ t^⌧
f dX = gdX. (4.4.4)
0 0
Definition 4.36. A process f is said to be locally bounded if there exist stop times ⌧ n ,
0  ⌧ 1  ⌧ 2  . . ., ⌧ n " 1 such that for every n,
f 1[0,⌧ n ] is bounded.
The sequence {⌧ n : n 1} is called a localizing sequence.
Thus if a process f is locally bounded, then we can get stop times ⌧ n increasing to
T
infinity (can even choose each ⌧ n to be bounded) and constants Cn such that
P(! : sup |ft (!)|  Cn ) = 1, 8n 1. (4.4.5)

0t⌧n (!)
localizing sequence {⌧ n : n
F
Note that given finitely many locally bounded processes one can choose a common
1}. A continuous adapted process X such that X0 is
bounded is easily seen to be locally bounded. We can take the localizing sequence to be
A
⌧n = inf{t 0 : |X(t)| n or t n}.
For an r.c.l.l. adapted process X, recall that X is the process defined by X (t) =
R
X(t ), where X(t ) is the left limit of X(s) at s = t for t > 0 and X (0) = X(0 ) = 0.
Let ⌧n be the stop times defined by
⌧n = inf{t 0 : |X(t)| n or |X(t )| n or t n}. (4.4.6)

D
Then it can be easily seen that X 1[0,⌧n ] is bounded by n and that ⌧n " 1 and hence
X is locally bounded. Easy to see that sum of locally bounded processes is itself locally
bounded. Further, if X is a r.c.l.l. process with bounded jumps : | X|  K, then X is
locally bounded, since X is locally bounded and ( X) is bounded and X = X + ( X).
Exercise 4.37. Let X be an r.c.l.l. adapted process. Show that X is locally bounded if and
only if X is locally bounded.
For future reference, we record these observations as a Lemma.
Lemma 4.38. Let X be an adapted r.c.l.l. process.

(i) If X is continuous with X0 bounded, then X is locally bounded.
(ii) X is locally bounded.
(iii) If X is bounded, then X is locally bounded.
We now prove an important property of the class L(X).
Theorem 4.39. Let X be an integrator and f be a predictable process such that there exist
stop times ⌧m increasing to 1 with
f 1[0,⌧m ] 2 L(X) 8n 1. (4.4.7)
Then f 2 L(X).
Proof. Let g n be bounded predictable such that g n ! g pointwise and |g n |  |f |. Let

R
T
Z n = g n dX. Now for each m,
g n 1[0,⌧m ] ! g 1[0,⌧m ] pointwise, (4.4.8)
|g n 1[0,⌧m ] |  |f 1[0,⌧m ] |
and Y n,m defined by

Y n,m
=
Z
F
g n 1[0,⌧m ] dX
(4.4.9)
(4.4.10)
A
satisfies
Ytn,m = Zt^⌧
n
m
. (4.4.11)
R
In view of (4.4.8), (4.4.9) the assumption (4.4.7) implies that for each m, {Y n,m : n 1}
is Cauchy in ducp metric. Thus invoking Corollary 2.73, we conclude that Z n is Cauchy in
ducp metric and hence f 2 L(X).
D
As noted earlier, f 2 L(X), h predictable, |h|  C|f | for some constant C > 0 implies
h 2 L(X). Thus the previous result gives us
Corollary 4.40. Let X be a stochastic integrator, g be a locally bounded predictable

process and f 2 L(X). Then f g belongs to L(X).
In particular, we have
Corollary 4.41. Let g be a locally bounded predictable process. Then g belongs to L(X)
for every stochastic integrator X. And if Y is an r.c.l.l. adapted process, then Y 2 L(X)
for every stochastic integrator X.
Exercise 4.42. Let X be a stochastic integrator. Let s0 = 0 < s1 < s2 < . . . < sn < . . .
with sn " 1. Let ⇠j , j = 1, 2 . . . , be such that ⇠j is Fsj 1 measurable.
P
(i) For n 1 let hn = nj=1 ⇠j 1(sj 1 ,sj ] . Show that hn 2 L(X) and
Z t Xn
n
h dX = ⇠j (Xsj ^t Xsj 1 ^t ).
0 j=1
P1
(ii) Let h = j=1 ⇠j 1(sj 1 ,sj ]
. Show that h 2 L(X) and
Z t X1
hdX = ⇠j (Xsj ^t Xsj 1 ^t ).
0 j=1
For an r.c.l.l. process X and a stop time , let X [ ] denote the process X stopped at
defined as follows
[ ]
T
Xt = Xt^ . (4.4.12)
Next result shows that if X is a stochastic integrator and is a stop time, then Y = X [ ]
is a stochastic integrator as well.
Z t Z t
F
Lemma 4.43. Let X be a stochastic integrator and be a stop time. Then X [
Rt
stochastic integrator and for f 2 L(X), writing Zt = 0 f dX, one has
] is also a
A
[ ]
Zt^ = f dX = (f 1[0, ] )dX. (4.4.13)
0 0
Proof. First one checks that (4.4.13) is true for f 2 S. Then for any bounded predictable
f , defining the process Z
R
J0 (f ) = (f 1[0, ] )dX
bp ucp
one can check that fn ! f implies J0 (fn ) ! J0 (f ) and hence it follows that X [ ]
D
is a stochastic integrator. Using (4.4.4), it follows that (4.4.13) is true for all bounded
predictable processes f . Finally, for a general f 2 L(X), the result follows by approximat-
ing f by f n = f 1{|f |n} and using dominated convergence theorem. This completes the
proof.
R
Exercise 4.44. Deduce the previous result using Theorem 4.29 by identifying X [ ] as gdX
for a suitable g 2 L(X).
The next result shows that if we localize the concept of integrator, we do not get
anything new- i.e. if a process is locally a stochastic integrator, then it is already a stochastic
integrator.
Theorem 4.45. Suppose X is an adapted r.c.l.l. process such that there exist stop times
n
⌧ n such that ⌧ n  ⌧ n+1 for all n and ⌧ n " 1 and the stopped processes X n = X [⌧ ] are
stochastic integrators. Then X is itself a stochastic integrator.
R
Proof. Fix f 2 B(⌦, e P) and for m 1 let U m = f dX m . Without loss of generality we
assume that ⌧ 0 = 0. Then using (4.4.4), it follows that Utm = Ut^⌧
k
m for m  k. We define
J0 (f ) by J0 (f )0 = f0 X0 and for m 1,
J0 (f )t = Utm , ⌧m 1
< t  ⌧ m. (4.4.14)
It follows that Z t
J0 (f )t^⌧ m = f dX m . (4.4.15)
0
Rt
Of course, for simple predictable f , J0 (f ) = 0 f dX and thus J0 is an extension of JX .
T
bp
Now let f n be bounded predictable such that f n ! f . Using (4.4.15), for n, m 1 we
have Z t
J0 (f n )t^⌧ m = f n dX m .
Writing Zn = J0(f n ) F
satisfy(2.5.9) and hence by Lemma 2.72 it follows that Z
n bp n ucp
0
and Z = J0 (f ), it follows using (4.4.15) that Z n , n
n ucp
1 and Z
! Z. We have thus proved
A
that f ! f implies J0 (f ) ! J0 (f ) and since J0 (f ) agrees with JX (f ) for simple
predictable f , it follows that X is a stochastic integrator.
We have seen a version of the dominated convergence theorem for stochastic integration.
R
Here is another result on convergence that will be needed later.

ucp
Theorem 4.46. Suppose Y n , Y 2 R0 (⌦, (F⇧ ), P), Y n ! Y and X is a stochastic inte-
grator. Then
D
Z Z
ucp
(Y n ) dX ! Y dX.
Proof. We have noted that Y and (Y n ) belong to L(X). Let

Z Z
n
bn = ducp ( (Y ) dX, Y dX).
To prove that bn ! 0 suffices to prove the following: For any subsequence {nk : k 1},
there exists a further subsequence {mj : j 1} of {nk : k 1} (i.e. 9 subsequence
{kj : j 1} such that mj = nkj ) such that
bmj ! 0. (4.4.16)
So now, given a subsequence {nk : k 1}, using ducp (Y nk , Y ) ! 0, let us choose mj = nkj
with kj+1 > kj and ducp (Y mj , Y )  2 j . Then as seen in the proof of Theorem 2.68, this
would imply
X1
m
[sup|Yt j Yt |] < 1, 8T < 1.
j=1 tT
Thus defining
1
X mj
Ht = | Yt Yt | (4.4.17)
j=1
it follows that (outside a fixed null set ) the convergence in (4.4.17) is uniform on t 2 [0, T ]
for all T < 1 and as a result H is an r.c.l.l. adapted process. Thus the processes (Y mj )
are dominated by (H + Y ) which is a locally bounded process, as H + Y is an r.c.l.l.
adapted process. Thus the dominated convergence Theorem 4.26 yields
T
Z Z
bmj = ducp ( (Y mj ) dX, Y dX) ! 0.
This completes the proof as explained above.
Exercise 4.47. Show that if Y n

locally bounded process.
ucp F
! Y , then there is a subsequence that is dominated by a
A
The subsequence technique used in the proof also yields the following result, which will
be useful alter.
R
ucp
Proposition 4.48. Let Y n ! Y , where Y n , Y are Rd -valued r.c.l.l. processes and g n , g :
[0, 1) ⇥ Rd 7! R be continuous functions such that g n converges to g uniformly on compact
ucp
subsets of [0, 1) ⇥ Rd . Let Ztn = g n (t, Ytn ) and Zt = g(t, Yt ). Then Z n ! Z.
D
Proof. Like in the previous proof, let bn = ducp (Z n , Z) and given any subsequence {nk :
k 1}, using ducp (Y nk , Y ) ! 0, choose mj = nkj with kj+1 > kj and ducp (Y mj , Y )  2 j .
It follows that
X1
m
[ sup|Yt j Yt | ] < 1, 8T < 1.
j=1 tT
m
and so [ suptT |Yt j Yt |] converges to zero for all T < 1 a.s. and now uniform convergence
of g n to g on compact subsets would yield convergence of Z mj to Z uniformly on [0, T ] for
all T and thus bmj = ducp (Z mj , Z) converges to 0. Thus every subsequence of {bn } has a
further subsequence converging to zero and hence limn!1 bn = 0.
4.5. Approximation by Riemann Sums 115
Essentially the same proof as given above for Theorem 4.46 gives the following result,
only di↵erence being that if X 2 V i.e. if Var[0,t] (X) < 1 for all t < 1, and Y is an r.c.l.l.
R R
adapted process, the integral Y dX is defined in addition to Y dX, both are defined
as Lebesgue-Stieltjes integrals while the later agrees with the stochastic integral (as seen
in Theorem 4.21).
ucp
Proposition 4.49. Suppose Y n , Y 2 R0 (⌦, (F⇧ ), P), Y n ! Y and X 2 V (a process
with finite variation paths). Then
Z Z
n ucp
(Y )dX ! Y dX.
4.5 Approximation by Riemann Sums
T
The next result shows that for an r.c.l.l. process Y and a stochastic integrator X, the
R
stochastic integral Y dX can be approximated by Riemann like sums, with one di↵erence-
the integrand must be evaluated at the lower end point of the interval as opposed to any
point in the interval in the Riemann-Stieltjes integral.
0 = tm m m
0 < t1 < . . . < tn < . . . ;
F
Theorem 4.50. Let Y be an r.c.l.l. adapted process and X be a stochastic integrator. Let
tm
n " 1 as n " 1 (4.5.1)
A
be a sequence of partitions of [0, 1) such that for all T < 1,
m (T ) =( sup (tm
n+1 tm
n )) ! 0 as m " 1. (4.5.2)
{n : tm
n T }
R
Let
1
X
Ztm = Ytm
n ^t
(Xtm
n+1 ^t
Xtm
n ^t
) (4.5.3)
n=0
R
D
and Z = Y dX. Note that for each t, m, the sum in (4.5.3) is a finite sum since
tm
n ^ t = t from some n onwards. Then
ucp
Zm !Z (4.5.4)
or in other words Z
1
X t
ucp
Ytm
n ^t
(X tm
n+1 ^t
Xtm
n ^t
) ! Y dX.
n=0 0
Proof. Let Y m be defined by

1
X
Ytm = Ytm 1 m m (t).
n ^t (tn , tn+1 ]
n=0
We will first prove Z

Y m dX = Z m . (4.5.5)
For this, let Vt = supst |Y |. Then V is an r.c.l.l. adapted process and hence V is locally
bounded.
Let us fix m and let k (x) = max(min(x, k), k), so that | k (x)|  k for all x 2 R. Let
k
X
Utk = k
(Ytm
n ^t
)1(tm m
n ,tn+1 ]
(t).
n=0
Then U k 2 S and U k converges pointwise (as k increases to 1) to Y m . Further, |Utk | 

Vt = V (t ) for all t and hence by the Dominated Convergence Theorem 4.26
Z t k
X
U k dX = k
(Ytm
n ^t
)(Xtm
n+1 ^t
Xtm
n ^t
)
T
0 n=0
R m dX.
converges to Y This proves (4.5.5).
m
Now, Y converges pointwise to Y and are dominated by the locally bounded process
V . Hence again by Theorem 4.26,
Z
m ucp
Z
Y dX ! Y dX
F
A
which is same as (4.5.4).
We will next show that the preceding result is true when the sequence of deterministic
partitions is replaced by a sequence of random partitions via stop times. For this, we need
R
the following lemma.
Lemma 4.51. Let X be a stochastic integrator, Z be an r.c.l.l. adapted process and ⌧ be

D
stop time. Let

h = Z⌧ 1(⌧,1) . (4.5.6)
Then h is locally bounded predictable and

Z t
hdX = Z⌧ ^t (Xt X⌧ ^t ). (4.5.7)
0
Proof. We have seen in Proposition 4.1 that h is predictable. Since
sup |hs |  sup |Zs |

0st 0st
and Z is locally bounded, it follows that h is locally bounded and thus h 2 L(X).
4.5. Approximation by Riemann Sums 117
If Z is a bounded r.c.l.l. adapted process and ⌧ takes finitely many values, then easy to
see that h belongs to S and that (4.5.7) is true. Now if ⌧ is a bounded stop time, then for
m 1, ⌧ m defined by
⌧ m = 2 m ([2m ⌧ ] + 1) (4.5.8)
are stop times, each taking finitely many values and ⌧ m # ⌧ . One can then verify (4.5.7) by
approximating ⌧ by ⌧ m defined via (4.5.8) and then using the fact that hm = Z⌧ m 1(⌧ m ,1)
converges boundedly pointwise to h, validity of (4.5.7) for ⌧ m implies the same for ⌧ . For
a general ⌧ , we approximate it by ⌧n = ⌧ ^ n. Thus, it follows that (4.5.6)-(4.5.7) are true
for bounded r.c.l.l. adapted processes Z. For a general Z, let
Z n = max(min(Z, n), n).
Noting that hn = Z⌧n 1(⌧,1) converges to h and |hn |  |h|, the validity of (4.5.7) for Z n
T
implies the same for Z.
Corollary 4.52. Let Z and ⌧ be as in the previous lemma and be another stop time
with ⌧  . Let
Then Z t
g = Z⌧ 1(⌧, ] . F (4.5.9)
A
gdX = Z⌧ ^t (Xt^ Xt^⌧ ) = Z⌧ (Xt^ Xt^⌧ ). (4.5.10)
0
The first equality follows from the observation that g = h1[0, ] where h is as in Lemma
Rt R·
4.51 and hence 0 gdX = ( 0 hdX)t^ (using Lemma 4.32). The second equality can be
R
directly verified.
Exercise 4.53. Express 1(⌧, ] as 1(⌧,1) 1( ,1) and thereby deduce the above Corollary from
Lemma 4.51.
D
Corollary 4.54. Let X be a stochastic integrator and ⌧  be stop times. Let ⇠ be a

F⌧ measurable random variable. Let
f = ⇠ 1(⌧, ] .
Then f 2 L(X) and

Z t
f dX = ⇠(Xt^ Xt^⌧ ).
0
Proof. This follows from the Corollary 4.52 by taking Z = ⇠ 1[⌧,1) and noting that as shown
in Lemma 2.39, Z is adapted.
Definition 4.55. For > 0, a -partition for an r.c.l.l. adapted process Z is a sequence of
stop times {⌧n ; : n 0} such that 0 = ⌧0 < ⌧1 < . . . < ⌧n < . . . ; ⌧n " 1 and
|Zt Z ⌧n |  for ⌧n  t < ⌧n+1 , n 0. (4.5.11)
Remark 4.56. Given r.c.l.l. adapted processes Z i , 1  i  k and > 0, we can get a
sequence of partitions {⌧n : n 0} such that {⌧n : n 0} is a partition for each of
Z 1 , Z 2 , . . . Z k . Indeed, let {⌧n : n 0} be defined inductively via ⌧0 = 0 and
⌧n+1 = inf{t > ⌧n : max( max |Zti Z⌧in |, max |Zti Z⌧in |) }. (4.5.12)
1ik 1ik
Invoking Theorem 2.44, we can see that {⌧n : n 0} are stop times and that limn"1 ⌧n = 1.
Let m # 0 and for each m, let {⌧nm : n 0} be a m -partition for Z. We implicitly

assume that m > 0. Let
X1
m
Zt = Zt^⌧nm 1(⌧nm ,⌧n+1
m ] (t).
T
n=0
ucp
Then it follows that |Ztm Zt |  m and hence Z m ! Z . For k 1, let
k
X
Z t
Ztm,k =
Xk
n=0 F
Zt^⌧nm 1(⌧nm ,⌧n+1
m ] (t).
Now, using Corollary 4.52 and linearity of stochastic integrals, we have

A
Z m,k dX = Zt^⌧nm (X⌧n+1
m ^t X⌧nm ^t ).
0 n=0
Let Vt = supst |Zs |. Then V is r.c.l.l. and thus as noted earlier, V is locally bounded.
Easy to see that |Zm,k |  V and Z m,k converges pointwise to Z m . Hence by Theorem
R
Rt ucp R t
4.26, 0 Z m,k dX ! 0 Z m dX. Thus
Z t X1
m
Z dX = Zt^⌧nm (X⌧n+1
m ^t X⌧nm ^t ). (4.5.13)
D
0 n=0
Since Zm converges pointwise to Z and |Z n |  V with V locally bounded, invoking
Theorem 4.26 it follows that Z Z
m ucp
Z dX ! Z dX. (4.5.14)
We have thus proved another version of Theorem 4.50.
Theorem 4.57. Let X be a stochastic integrator. Let Z be an r.c.l.l. adapted process. Let
m # 0 and for m 1 let {⌧nm : n 1} be a m -partition for Z. Then
X1 Z t
ucp
Zt^⌧nm (X⌧n+1 ^t X⌧nm ^t ) !
m Z dX. (4.5.15)
n=0 0
4.6. Quadratic Variation of Stochastic Integrators 119
P
Remark 4.58. When m ( m )2 < 1, say m = 2 m , then the convergence in (4.5.15) is
stronger: it is uniform convergence on [0, T ] almost surely for each T < 1. We will prove this
in Chapter (6).
4.6 Quadratic Variation of Stochastic Integrators

We now show that stochastic integrators also, like Brownian motion, have finite quadratic
variation.
Theorem 4.59. Let X be a stochastic integrator. Then there exists an adapted increasing
process A, written as [X, X], such that
Z t
2 2
Xt = X0 + 2 X dX + [X, X]t , 8t. (4.6.1)
0
T
Further, Let m # 0 and for m 1 let {⌧nm : n 1} be a m -partition for X. Then one
has
1
X ucp
(X⌧n+1
m ^t X⌧nm ^t )2 ! [X, X]t . (4.6.2)
Proof. For a, b 2 R,
n=0
b2 a2 = 2a(b
F a) + (b a)2 .
A
Using this with b = X⌧n+1
m ^t and a = X⌧ m ^t and summing with respect to n, we get
n
Xt2 = X02 + 2Vtm + Qm

t
R
where
1
X
Vtm = X⌧nm ^t (X⌧n+1
m ^t X⌧nm ^t )
n=0
D
and
1
X
Qm
t = (X⌧n+1
m ^t X⌧nm ^t )2 .
n=0
Note that after some n that may depend upon ! 2 ⌦, ⌧nm > t and hence X⌧n+1
m ^t = Xt . In
view of this, the two sums above have only finitely many non-zero terms.
ucp R
By Theorem 4.57, V m ! X dX. Hence, writing
Z t
2 2
At = X t X 0 2 X dX, (4.6.3)
0
we conclude
ucp
Qm
t ! At .
This proves (4.6.1). Remains to show that At is an increasing process. Fix ! 2 ⌦, s  t,

and note that if ⌧jm  s < ⌧j+1
m , then |X
s X⌧jm |  m and
j 1
X
Qm
s = (X⌧n+1
m X⌧nm )2 + (Xs X⌧jm )2
n=0
and
j 1
X 1
X
Qm
t = (X⌧n+1
m X⌧nm )2 + (X⌧n+1
m ^t X⌧nm ^t )2 .
n=0 n=j
Thus
Qm m
s  Qt +
2
m. (4.6.4)
ucp
Since Qm ! A, it follows that A is an increasing process.
Remark 4.60. From the identity (4.6.1), it follows that the process [X, X] does not depend
T
upon the choice of partitions {⌧nm : n 1}.
Definition 4.61. For a stochastic integrator X, the process [X, X] obtained in the previous
theorem is called the Quadratic Variation of X.
F
From the definition of quadratic variation, it follows that for a stochastic integrator X
and a stop time
A
[X [ ] , X [ ] ]t = [X, X]t^ 8t. (4.6.5)
For stochastic integrators X, Y , let us define cross-quadratic variation between X, Y
via the polarization identity
R
1
[X, Y ]t = ([X + Y, X + Y ]t [X Y, X Y ]t ) (4.6.6)
4
By definition [X, Y ] 2 V since it is defined as di↵erence of two increasing processes. Also,
D
it is easy to see that [X, Y ] = [Y, X].

By applying Theorem 4.59 to X + Y and X Y and using that the mapping (f, X) 7!
R
f dX is bilinear one can deduce the following result.
Theorem 4.62. (Integration by Parts Formula) Let X, Y be stochastic integrators.

Then Z t Z t
Xt Yt = X0 Y0 + Y dX + X dY + [X, Y ]t , 8t. (4.6.7)
0 0
Let m # 0 and for m 1 let {⌧nm : n 1} be a m -partition for X and Y . Then one has
1
X ucp
(X⌧n+1
m ^t X⌧nm ^t )(Y⌧n+1
m ^t Y⌧nm ^t ) ! [X, Y ]t . (4.6.8)
n=0
Remark 4.63. Like (4.6.5), one also has for any stop time and stochastic integrators X, Y :
[X [ ] , Y ]t = [X, Y [ ] ]t = [X [ ] , Y [ ] ]t = [X, Y ]t^ 8t. (4.6.9)
This follows easily from (4.6.8).
Exercise 4.64. For stochastic integrators X, Y and stops and ⌧ show that
^⌧ ]
[X [ ] , Y [⌧ ] ] = [X, Y ][ .
Corollary 4.65. Let X, Y be stochastic integrators. Then
(i) [X, X]t = (( X)t )2 , for t > 0.

P
(ii) 0<st (( X)s )2  [X, X]t < 1.
(iii) [X, Y ]t = ( X)t ( Y )t for t > 0.
T
(iv) If X (or Y ) is a continuous process, then [X, Y ] is also a continuous process.
Proof. For (i), using (4.6.1) and (4.3.7), we get for every t > 0
Using b2 a2
Xt2
2a(b
Xt2 = 2Xt (Xt
a) = (b a)2 , we get
F
Xt ) + [X, X]t [X, X]t .
A
(Xt Xt )2 = [X, X]t [X, X]t
which is same as (i). (ii) follows from (i) as [X, X]t is an increasing process. (iii) follows
from (i) via the polarization identity (4.6.6). And lastly, (iv) is an easy consequence of
R
(iii).
Remark 4.66. Let us note that by definition, [X, X] 2 V+

0 and [X, Y ] 2 V0 i.e. [X, X]0 = 0
and [X, Y ]0 = 0.
D
The next result shows that for a continuous process A 2 V, [X, A] = 0 for all stochastic
integrators X.
Theorem 4.67. Let X be a stochastic integrator and A 2 V, i.e. an r.c.l.l. process with
finite variation paths. Then
X
[X, A]t = ( X)s ( A)s . (4.6.10)
0<st
In particular, if X, A have no common jumps, then [X, A] = 0. This is clearly the case if
one of the two processes is continuous.
Proof. Since A 2 V, for {⌧nm } as in Theorem 4.62 above one has

X1 Z t
ucp
X⌧nm ^t (A⌧n+1
m ^t A⌧nm ^t ) ! X dA
n=0 0
and Z
1
X t
ucp
X m ^t
⌧n+1 (Am ^t
⌧n+1 A ⌧nm ^t ) ! X dA.
n=0 0+
Using (4.6.8) we conclude

Z t Z t
[X, A]t = X dA X dA
0+ 0
and hence (4.6.10) follows.
For stochastic integrators X, Y , let

X
T
j(X, Y )t = ( X)s ( Y )s .
0<st
The sum above is absolutely convergent in view of part (ii) Corollary 4.65. Clearly,
j(X, X) is an increasing process. Also we have seen that
F
j(X, X)t  [X, X]t . (4.6.11)
A
We can directly verify that j(X, Y ) satisfies the polarization identity
1
[j(X, Y )t = (j(X + Y, X + Y )t j(X Y, X Y )t ). (4.6.12)
4
The identity (4.6.7) characterizes [X, Y ]t and it shows that (X, Y ) 7! [X, Y ]t is a
R
bilinear form. The relation (4.6.8) also yields the parallelogram identity for [X, Y ]:
Lemma 4.68. Let X, Y be stochastic integrators. Then we have

D
[X + Y, X + Y ]t + [X Y, X Y ]t = 2([X, X]t + [Y, Y ]t ), 8t 0. (4.6.13)
Proof. Let m # 0 and for m 1 let {⌧nm : n 1} be a m -partition for X. and take
m
an = (X⌧n+1m ^t m
X⌧nm ^t ), bn = (Y⌧n+1
m ^t Y⌧nm ^t ). Use the identity (a + b)2 + (a b)2 =
2(a2 + b2 ) with a = am m
n and b = bn ; sum over n and take limit over m. We will get the
required identity by (4.6.2).
p
Here is an analogue of the inequality |a2 b2 |  2(a b)2 (a2 + b2 ).
Lemma 4.69. Let X, Y be stochastic integrators. Then we have

p
|[X, X]t [Y, Y ]t |  2[X Y, X Y ]t ([X, X]t + [Y, Y ]t ). (4.6.14)
Proof. Let ⌧nm , am m

n , bn be as in the proof of Lemma 4.68 above. Then we have
X X X
| (am n)
2
(bm 2
n) | |(am
n)
2
(bm 2
n) |
n n n
Xp
 2(am
n bm 2 m 2 m 2
n ) ((an ) + (bn ) )
n
s s
X X
 2 (am
n bm
n)
2 ((am 2 m 2
n ) + (bn ) )
n n
and taking limit over m, using (4.6.2), we get the required result (4.6.14).
Also, using that

[aX + bY, aX + bY ]t 0 8a, b 2 R
we can deduce that
p
|[X, Y ]t |  [X, X]t [Y, Y ]t .
T
Indeed, one has to do this carefully (in view of the null sets lurking around). We can prove
a little bit more.
p
p F
Theorem 4.70. Let X, Y be stochastic integrators. Then for any s  t
Var(s,t] ([X, Y ])  ([X, X]t [X, X]s ).([Y, Y ]t [Y, Y ]s ),
Var[s,t] ([X, Y ])  ([X, X]t [X, X]s ).([Y, Y ]t [Y, Y ]s ),

(4.6.15)
(4.6.16)
A
and
p
Var[0,t] ([X, Y ]) 
[X, X]t [Y, Y ]t , (4.6.17)
p
R
Var[0,t] (j(X, Y ))  [X, X]t [Y, Y ]t . (4.6.18)
Proof. Let
⌦a,b,s,r = {! 2 ⌦ : [aX + bY, aX + bY ]r (!) [aX + bY, aX + bY ]s (!)}
D
and
⌦0 = [{⌦a,b,s,r : s, r, a, b 2 Q, r s}.
Then it follows that P(⌦0 ) = 1 (since for any process Z, [Z, Z] is an increasing process).
For ! 2 ⌦0 , for 0  s  r, s, r, a, b 2 Q
(a2 ([X, X]r [X, X]s ) + b2 ([Y, Y ]r [Y, Y ]s ) + 2ab([X, Y ]r [X, Y ]s ))(!) 0.
Since the quadratic form above remains positive, we conclude
|([X, Y ]r (!) [X, Y ]s (!))|
p (4.6.19)
 ([X, X]r (!) [X, X]s (!))([Y, Y ]r (!) [Y, Y ]s (!)).
Since all the process occurring in (4.6.19) are r.c.l.l., it follows that (4.6.19) is true for
all s  r, s, r 2 [0, 1). Taking s = 0, this proves (4.6.21). Now given s < t and
s = t0 < t1 < . . . < tm = t, we have
mX1
|[X, Y ]tj+1 [X, Y ]tj |
j=0
X1 q
m
(4.6.20)
 ([X, X]tj+1 [X, X]tj )([Y, Y ]tj+1 [Y, Y ]tj )
j=0
p
 ([X, X]t [X, X]s )([Y, Y ]t [Y, Y ]s )
where the last step follows from Cauchy-Schwarz inequality using the fact that [X, X], [Y, Y ]
are increasing processes. Now taking supremum over partitions of [s, t] in (4.6.20) we get
(4.6.15). For (4.6.16), recalling definition of Var[a,b] (G) we have
T
Var[s,t] ([X, Y ]) = Var(s,t] ([X, Y ]) + |( [X, Y ])s |
p
 ([X, X]t [X, X]s )([Y, Y ]t [Y, Y ]s ) + |( X)s ( Y )s |
p
 ([X, X]t [X, X]s + ( X)2s )([Y, Y ]t [Y, Y ]s + ( Y )2s )
p
 ([X, X]t F
[X, X]s )([Y, Y ]t
Now (4.6.17) follows from (4.6.16) taking s = 0. As for (4.6.18), note that
Var[0,t] (j(X, Y )) =
X
|( X)s ( Y )s |
[Y, Y ]s ).
A
0<st
sX X
 ( X)2s ( Y )2s
0<st 0<st
R
p
 [X, X]t [Y, Y ]t .
D
Corollary 4.71. For stochastic integrators X, Y , one has

p
|[X, Y ]t |  [X, X]t [Y, Y ]t (4.6.21)
and
p p p
[X + Y, X + Y ]t  [X, X]t + [Y, Y ]t (4.6.22)
Proof. Taking s = 0 and using |[X, Y ]t |  Var[0,t] ([X, Y ]) (4.6.21) follows from (4.6.17).
In turn using (4.6.21) we note that
[X + Y, X + Y ]t = [X, X]t + [Y, Y ]t + 2[X, Y ]t
p
 [X, X]t + [Y, Y ]t + 2 [X, X]t [Y, Y ]t
p p
= ( [X, X]t + [Y, Y ]t )2 .
Thus (4.6.22) follows.
The next inequality is a version of the Kunita-Watanabe inequality, that was proven in
the context of square integrable martingales.
Theorem 4.72. Let X, Y be stochastic integrators and let f, g be predictable processes.

Then for all T < 1
Z T Z T Z T
1 1
2
|fs gs |d|[X, Y ]|s  ( |fs | d[X, X]s ) (
2 |gs |2 d[Y, Y ]s ) 2 . (4.6.23)
0 0 0
Proof. Let us write At = |[X, Y ]|t = Var[0,t] ([X, Y ]). Note A0 = 0 by definition of quadratic
variation. We first observe that (4.6.23) holds for simple predictable processes f, g 2 S.
As seen in the proof of Theorem 4.29, we can assume that f, g are given by (4.3.11) and
(4.3.12). Using (4.6.15), it follows that for 0  s < t
T
1 1
|At As |  ([X, X]t [X, X]s ) 2 ([Y, Y ]t [Y, Y ]s ) 2
and hence
Z T
=
|fs gs |d|[X, Y ]|s
k
X
|cj+1 dj+1 |(Arj+1 Ar j )
F
A
j=0
k
X 1 1
 |cj+1 dj+1 |([X, X]rj+1 [X, X]rj ) 2 ([Y, Y ]rj+1 [Y, Y ]rj ) 2
j=0
R
k
X k
X
1 1
( c2j+1 ([X, X]rj+1 [X, X]rj )) 2 ( d2j+1 ([Y, Y ]rj+1 [Y, Y ]rj )) 2
j=0 j=0
Z T Z T
1 1
|fs |2 d[X, X]s ) 2 · ( |gs |2 d[Y, Y ]s ) 2 .
D
=(
0 0
This proves (4.6.23) for f, g 2 S. Now using functional version of monotone class theorem,
Theorem 2.64 one can deduce that (4.6.23) continues to hold for all bounded predictable
processes f, g. Finally, for general f, g, the inequality follows by approximating f, g by
f n = f 1{|f |n} and g n = g 1{|g|n} respectively and using monotone convergence theorem
(recall, that integrals appearing in this result are Lebesgue-Stieltjes integrals with respect
to increasing processes.)
Remark 4.73. Equivalent Probability Measures continued: Let X be a stochastic integrator

on (⌦, F, P). Let Q be a probability measure equivalent to P. We have seen in Remark 4.15
that X is also a stochastic integrator on (⌦, F, Q) and the class L(X) under the two measures
R
is the same and for f 2 L(X), the stochastic integral f dX on the two spaces is identical.
It follows (directly from definition or from (4.6.1)) that the quadratic variation of X is the
same when X is considered on (⌦, F, P) or (⌦, F, Q).
4.7 Quadratic Variation of the Stochastic Integral

R
In this section, we will relate the quadratic variation of Y = f dX with the quadratic
variation of X. We will show that for stochastic integrators X, Z and f 2 L(X), g 2 L(Z)
Z Z Z
[ f dX, gdZ] = f gd[X, Z]. (4.7.1)
We begin with a simple result.
Lemma 4.74. Let X be a stochastic integrator, f 2 L(X), 0  u < 1, b be a Fu measurable
T
bounded random variable. Then
h = b1(u,1) f
is predictable, h 2 L(X) and
Z t
0
b1(u,1) f dX = b
Z t
F Z t
1(u,1) f dX = b ( f dX
0 0
Z
0
Proof. When f 2 S, validity of (4.7.2) can be verified directly as then h is also simple
u^t
f dX). (4.7.2)
A
predictable. Then, the class of f such that (4.7.2) is true can be seen to be closed under
bp-convergence and hence by Theorem 2.64, (4.7.2) is valid for all bounded predictable
processes. Finally, since b is bounded, say by c, |h|  c|f | and hence h 2 L(X). Now
R
(4.7.2) can be shown to be true for all f 2 L(X) by approximating f by f n = f 1{|f |n}
and using Dominated Convergence Theorem - Theorem 4.26.
Lemma 4.75. Let X, Z be a stochastic integrators, 0  u < 1, b be a Fu measurable

D
R
bounded random variable. Let g = b1(u,1) and Y = gdX. Then
Z t Z t Z t
Yt Zt = Zs dYs + Ys dZs + gs d[X, Z]s . (4.7.3)
0 0 0
Proof. Noting that Yt = b(Xt Xu^t ) and writing Vt = Xt Xu^t , we have,
Yt Zt =b (Zt Xt Zt Xu^t )
=b (Xt Zt Xu^t Zu^t Xu^t Zt + Xu^t Zu^t )
Z t Z u^t Z t Z u^t
=b ( X dZ X dZ + Z dX Z dX)
0 0 0 0
+ b ([X, Z]t [X, Z]u^t Xu^t (Zt Zu^t )).
4.7. Quadratic Variation of the Stochastic Integral 127
Noting that Z Z Z
t u^t t
X dZ X dZ Xu^t (Zt Zu^t ) = V dZ
0 0 0
R u^t
since Vs = 0 for 0  s  u, V
dZ = 0 and we get
0
Z t Z t Z u^t
Yt Zt = b ( U dZ + Z dX Z dX + [X, Z]t [X, Z]u^t ).
0 0 0
R u^t
Invoking Lemma 4.74 and again using 0 V dZ = 0 we conclude that (4.7.3) holds.
Theorem 4.76. Let X, Y be stochastic integrators and let f, h be bounded predictable

processes. Then Z Z Z t
[ f dX, hdY ]t = f hd[X, Y ]. (4.7.4)
0
Proof. Fix a stochastic integrator Z and let K be the class of bounded predictable processes
T
f such that Z
Wt = f dX (4.7.5)
Z t Z t Z t
Wt Z t = W0 Z 0 +
0
W dZ +
F 0
Z dW +
Easy to see that K is a linear space and that it is closed under bounded pointwise conver-
gence of sequences. It trivially contains constants and we have seen in Lemma 4.75 that K
0
fs d[X, Z]s . (4.7.6)
A
contains g = b1(u,1) , where 0  u < 1 and b is Fu measurable bounded random variable
and since S is the linear span of such processes, it follows that S ✓ K.
Now Theorem 2.64 implies that (4.7.5)-(4.7.6) hold for all bounded predictable pro-
R
cesses. Comparing with (4.6.7), we conclude that for any stochastic integrator Z
Z Z
[ f dX, Z] = f d[X, Z]. (4.7.7)
R
D
For Z = hdY , we can use (4.7.7) to conclude

Z
[Z, X] = hd[Y, X]
and using symmetry of the cross quadratic variation [X, Y ], we conclude

Z
[X, Z] = hd[X, Y ]. (4.7.8)
The two equations (4.7.7) - (4.7.8) together give

R R R R
[ f dX, hdY ] = f d[X, hdY ]
R (4.7.9)
= f hd[X, Y ].
We would like to show that (4.7.4) is true for all f 2 L(X) and h 2 L(Y ).
Theorem 4.77. Let X, Y be stochastic integrators and let f 2 L(X), g 2 L(Y ) and let
R R
U = f dX, V = gdY . Then
Z t
[U, V ]t = f gd[X, Y ]. (4.7.10)
0
R
Proof. Let us approximate f, g by f n = f 1{|f |n} and g n = g 1{|g|n} and let U n = f n dX,
R ucp ucp
V n = g n dY . Since f 2 L(X) and g 2 L(Y ), by definition U n ! U and V n ! V . Now
using Theorem 2.69 (also see the Remark following the result) we can get a subsequence
{nk } and a r.c.l.l. adapted increasing process H such that
k k
|Utn | + |Vtn |  Ht 8k 1. (4.7.11)
Using (4.7.4) for f n , g n (since they are bounded) we get invoking Theorem 4.29
T
Z t Z t
n n n n n n
U t V t = U 0 V0 + Us dVs + Vsn dUsn + [U n , V n ]t
0 0
Z t Z t Z t (4.7.12)
n n n n n n n n
= U 0 V0 + Us gs dYs + Vs fs dXs + fs gs d[X, Y ]s .
n 2
0
Taking Y = X and g = f in (4.7.12) we get
n 2
Z t
n n
0
Z t
F
(fsn )2 d[X, X]s .
0
A
(Ut ) = (U0 ) + 2 Us fs dXs + (4.7.13)
0 0
In (4.7.13), we would like to take limit as n ! 1. Since (fsn )2 = fs2 1{|f |n} increases to
fs2 , using monotone convergence theorem, we get
R
Z t Z t
n 2
(fs ) d[X, X]s ! fs2 d[X, X]s . (4.7.14)
0 0
For the stochastic integral term, taking limit along the subsequence {nk } (chosen so that
D
(4.7.11) holds) and using H f 2 L(X) (see Corollary 4.40) and dominated convergence
theorem (Theorem 4.26), we get
Z t Z t
nk nk ucp
Us fs dXs ! Us fs dXs . (4.7.15)
0 0
ucp
Thus putting together (4.7.13), (4.7.14) and (4.7.15) along with U n ! U we conclude
Z t Z t
2 2
(Ut ) = (U0 ) + 2 Us fs dXs + (fs )2 d[X, X]s . (4.7.16)
0 0
This implies Z t
[U, U ]t = (fs )2 d[X, X]s . (4.7.17)
0
4.7. Quadratic Variation of the Stochastic Integral 129
More importantly, this implies

Z t
(fs (!))2 d[X, X]s (!) < 1 8t < 1 a.s. (4.7.18)
0
Likewise, we also have
Z t
(gs (!))2 d[Y, Y ]s (!) < 1 8t < 1 a.s. (4.7.19)
0
Now invoking Theorem 4.72 along with (4.7.18)-(4.7.19), we get

Z t
|fs (!)gs (!)|d|[X, Y ]|s (!) < 1 8t < 1 a.s. (4.7.20)
0
and then using dominated convergence theorem (for signed measures) we conclude
Z t Z t
n n
fs (!)gs (!)d[X, Y ]s (!) ! fs (!)gs (!)d[X, Y ]s (!) 8t < 1 a.s. (4.7.21)
T
0 0
In view of (4.7.21), taking limit in (4.7.12) along the subsequence {nk } and using argument
similar to the one leading to (4.7.16), we conclude
Z t Z t Z t
U t Vt = U 0 V0 +
which in turn implies

Us gs dYs +
0
Vs fs dXs + F
fs gs d[X, Y ]s
0 0
A
Z t Z t Z t
U t Vt = U 0 V0 + Us dVs + Vs dUs + fs gs d[X, Y ]s
0 0 0
and hence that Z t
R
[U, V ]t = fs gs d[X, Y ]s .
0
D
The earlier proof contains a proof of the following Theorem. Of course, this can also
be deduced by taking f = h and X = Y .
R
Theorem 4.78. Let X be stochastic integrators and let f 2 L(X) and let U = f dX.
Then Z t
[U, U ]t = f 2 d[X, X] (4.7.22)
0
Remark 4.79. In Particular, it follows that for a stochastic integrator X, if f 2 L(X) then
Z t
fs2 d[X, X]s < 1 a.s. 8t < 1.
0
4.8 Ito’s Formula

Ito’s formula is a change of variable formula for stochastic integral. Let us look at the
familiar change of variable formula in usual Calculus. Let G be a continuously di↵erentiable
function on [0, 1) with derivative G0 = g and f be a continuously di↵erentiable function
on R. Then Z t
f (G(t)) = f (G(0)) + f 0 (G(s))g(s)ds. (4.8.1)
0
d
This can be proven by observing that dt f (G(t)) = f 0 (G(t))g(t) and using the fundamental
theorem of integral calculus. What can we say when G(t) is not continuously di↵erentiable?
Let us recast the change of variable formula as
Z t
f (G(t)) = f (G(0)) + f 0 (G(s))dG(s). (4.8.2)
T
0+
Now this is true as long as G is a continuous function with finite variation. Let |G(s)|  K
for 0  s  t. Let
h(") = sup{|f 0 (x1 )
a( ) = sup{|G(t1 )
f 0 (x2 )| :
FK  x1 , x2  K, |x1
G(t2 )| : 0  t1 , t2  t, |t1
x2 |  "},
t2 |  },
A
so that h(a( nt )) ! 0 as n ! 1 in view of uniform continuity of f on [ K, K] and G on
[0, t].
it
Let us write tni = n. Now using the mean value theorem, we get
R
f (G(tni+1 )) f (G(tni )) = f 0 (✓in )(G(tni+1 ) G(tni ))

(4.8.3)
=[f 0 (G(tni )) + {f 0 (✓in ) f 0 (G(tni ))}](G(tni+1 ) G(tni ))
where ✓in = G(tni ) + uni (G(tni+1 ) G(tni )), for some uni , 0  uni  1. Now, it is easily seen
D
that
n
X1
f (G(t)) f (G(0)) = [f (G(tni+1 )) f (G(tni ))] (4.8.4)
i=0
and using dominated convergence theorem for Lebesgue-Stieltjes integration, we have

n
X1 Z t
lim [f 0 (G(tni ))(G(tni+1 ) G(tni ))] = f 0 (G(s))dG(s). (4.8.5)
n!1 0+
i=0
Since |G(tni+1 ) G(tni )|  a(tn 1 ), it follows that
|(f 0 (✓in ) f 0 (G(tni )))|  h(a(tn 1

)) (4.8.6)
4.8. Ito’s Formula 131
since ✓in = G(tni ) + uni (G(tni+1 ) G(tni )), with uni , 0  uni  1. Hence,
n
X1
| [f 0 (✓in ) f 0 (G(tni ))](G(tni+1 ) G(tni ))|
i=0
n
X1
1
 h(a(tn )) |G(tni+1 ) G(tni )| (4.8.7)
i=0
1
 h(a(tn ))Var(0,t] (G)
! 0.
Now putting together (4.8.3)-(4.8.7) we conclude that (4.8.2) is true.

From the proof we see that unless the integrator has finite variation on [0, T ], the sum
of error terms may not go to zero. For a stochastic integrator, we have seen that the
T
quadratic variation is finite. This means we should keep track of first two terms in Taylor
expansion and take their limits (and prove that remainder goes to zero). Note that (4.8.3)
is essentially using Taylor expansion up to one term with remainder, but we had assumed
that f is only once continuously di↵erentiable.
F
The following lemma is a crucial step in the proof of the Ito formula. First part is
proven earlier, stated here for comparison and ease of reference.
A
Lemma 4.80. Let X, Y be stochastic integrators and let Z be an r.c.l.l. adapted process.
Let m # 0 and for m 1 let {⌧nm : n 1} be a m -partition for X, Y and Z. Then
R
1
X Z t
ucp
Z⌧nm ^t (X⌧n+1
m ^t X⌧nm ^t ) ! Z dX (4.8.8)
n=0 0
D
and
1
X Z t
ucp
Z⌧nm ^t (X m ^t
⌧n+1 X⌧nm ^t )(Y m ^t
⌧n+1 Y⌧nm ^t ) ! Z d[X, Y ]. (4.8.9)
n=0 0
Rt Rt
Remark 4.81. Observe that if Z is continuous 0 Z dX = 0+ Z dX
Proof. The first part, (4.8.8) has been proved in Theorem 4.57. The second part for the
special case Z = 1 is proven in Theorem 4.62. For (4.8.9), note that
Ant = Btn Ctn Dtn

where
1
X
Ant = Z⌧nm ^t (X⌧n+1
m ^t X⌧nm ^t )(Y⌧n+1
m ^t Y⌧nm ^t ),
n=0
X1
Btn = Z⌧nm ^t (X⌧n+1
m ^t Y⌧ m ^t
n+1
X⌧nm ^t Y⌧nm ^t ),
n=0
X1
Ctn = Z⌧nm ^t X⌧nm ^t (Y⌧n+1
m ^t Y⌧nm ^t ),
n=0
X1
Dtn = Z⌧nm ^t Y⌧nm ^t (X⌧n+1
m ^t X⌧nm ^t ).
n=0
Now using (4.8.8), we have
Z t
ucp
Btn ! Z d(XY )
T
0
Z t Z t Z
n ucp
Ct ! Z X dY = Z dS where S = X dY
0 0
Z t Z t Z
n ucp
Dt ! Z Y dX =
0 0 F
Z dR where R = Y dX.
Here we have used Theorem 4.29. Using bilinearity of integration, it follows that
n ucp
Z t
A
At ! Z dV
0
Rt Rt
where Vt = Xt Yt X0 Y0 0 X dY 0 Y dX. As seen in Theorem 4.62, Vt = [X, Y ]t .
R
Remark 4.82. If {⌧nm : m 1} is a sequence of partitions of [0, 1) via stop times

0 = ⌧0m < ⌧1m < ⌧2m . . . ; ⌧nm " 1, m 1
D
such that for all n, m

m
(⌧n+1 ⌧nm )  2 m
then (4.8.9) holds for all r.c.l.l. adapted processes X, Y, Z.
We will first prove a single variable change of variable formula for a continuous stochastic
integrator and then go on to the multivariate version.
Now let us fix a twice continuously di↵erentiable function f . The standard version of
Taylor’s theorem gives
Z b
0
f (b) = f (a) + f (a)(b a) + f 00 (s)(b s)ds. (4.8.10)
a
However, we need the expansion up to two terms with an estimate on the remainder. Let
us write
1
f (b) = f (a) + f 0 (a)(b a) + f 00 (a)(b a)2 + Rf (a, b) (4.8.11)
2
where Z b
Rf (a, b) = [f 00 (s) f 00 (a)](b s)ds.
a
Since f 00 is assumed to be continuous, for any K < 1, f 00 is uniformly continuous and
bounded on [ K, K] so that
lim ⇤f (K, ) = 0
!0
where
2
⇤f (K, ) = sup{|Rf (a, b)(b a) | : a, b 2 [ K, K], 0 < |b a| < }.
Here is the univariate version of the Ito formula for continuous stochastic integrators.
T
Theorem 4.83. (Ito’s formula - first version) Let f be a a twice continuously di↵eren-
tiable function on R and X be a continuous stochastic integrator. Then
Z t Z
1 t 00
f (Xt ) = f (X0 ) +
0
0
f (Xu )1{u>0} dXu +
Remark 4.84. Equivalently, we can write the formula as

Z t Z
1 t 00
2 0 F
f (Xu )d[X, X]u .
A
f (Xt ) = f (X0 ) + f 0 (Xu )dXu + f (Xu )d[X, X]u .
0+ 2 0
ti
Proof. Fix t. Let tni = n for i 0, n 1. Let
Uin = f (Xtni+1 )
R
f (Xtni ), (4.8.12)
Vin = f 0 (Xtni )(Xtni+1 Xtni ), (4.8.13)
1
Win = f 00 (Xtni )(Xtni+1 Xtni )2 , (4.8.14)
D
2
n
Ri = Rf (Xtni , Xtni+1 ). (4.8.15)
Then one has
Uin = Vin + Win + Rin (Xtni+1 Xtni )2 , (4.8.16)
n
X1
Uin = f (Xt ) f (X0 ). (4.8.17)
i=0
Further using (4.8.8) and (4.8.9) (see remark 4.81), we get
n
X1 Z t
n
Vi ! f 0 (Xu )1{u>0} dXu in probability, (4.8.18)
i=0 0
n
X1 Z t
1
Win ! f 00 (Xu )d[X, X]u in probability. (4.8.19)
2 0
i=0
In view of (4.8.12)-(4.8.19) and the fact that

n
X1
(Xtni+1 Xtni )2 ! [X, X]t in probability
i=0
it suffices to prove that,
sup Rin ! 0 in probability.
i
Indeed, to complete the proof we will show
sup Rin ! 0 almost surely. (4.8.20)

i
Observe that
T
|Rin (!)|  |Rf (Xtni (!), Xtni+1 (!))|.
For each !, u 7! Xu (!) is uniformly continuous on [0, t] and hence
n (!)
Let Kt (!) = sup0ut |Xu (!)| Now

= [sup|Xtni+1 (!)
i
sup|Rin (!)|  ⇤f (Kt (!),

F Xtni (!)| ] ! 0.
A
n (!))
i
and since n (!) ! 0, it follows that (4.8.20) is valid completing the proof.
Applying the Ito formula with f (x) = xm , m 2, we get

R
Z t Z
m(m 1) t m
Xtm = X0m + mXum 1 1{u>0} dXu + Xu 2
1{u>0} d[X, X]u
0 2 0
and taking f (x) = exp(x) we get
D
Z t Z t
1
exp(Xt ) = exp(X0 ) + exp(Xu )dXu + exp(Xu )d[X, X]u .
0+ 2 0
We now turn to the multidimensional version of the Ito formula. Its proof given below
is in the same spirit as the one given above in the one dimensional case and is based on
the Taylor series expansion of a function. This idea is classical and the proof given here is
a simplification of the proof presented in Metivier [48]. A similar proof was also given in
Kallianpur and Karandikar [31].
We will first prove the required version of Taylor’s theorem. Here, | · | denotes the
Euclidean norm on Rd , U will denote a fixed open convex subset of Rd and C 1,2 ([0, 1) ⇥ U )
denotes the class of functions f : [0, 1) ⇥ U 7! R that are once continuously di↵erentiable
in t and twice continuously di↵erentiable in x 2 U . Also, for f 2 C 1,2 ([0, 1) ⇥ U), f0
denotes the partial derivative of f in the t variable, fj denotes the partial derivative of f
w.r.t. j th coordinate of x = (x1 , . . . , xd ) and fjk denote the partial derivative of fj w.r.t.
k th coordinate of x = (x1 , . . . , xd ).
Lemma 4.85. Let f 2 C 1,2 ([0, 1) ⇥ U ). Define h : [0, 1) ⇥ U ⇥ U ! R as follows. For

t 2 [0, 1), y = (y 1 , . . . , y d ), x = (x1 , . . . , xd ) 2 U , let
d
X
h(t, y, x) =f (t, y) f (t, x) (y j xj )fj (t, x)
j=1
(4.8.21)
d
X
1 j j k k
(y x )(y x )fjk (t, x).
2
T
j,k=1
Then there exist continuous functions gjk : [0, 1) ⇥ U ⇥ U ! R such that for t 2 [0, 1),
y = (y 1 , . . . , y d ), x = (x1 , . . . , xd ) 2 U ,
h(t, y, x) =
d
X
j,k=1
Further, the following holds. Define for T < 1, K ✓ U and

F
gjk (t, y, x)(y j xj )(y k xk ).
> 0,
(4.8.22)
A
2
(T, K, ) = sup{|h(t, y, x)||y x| : 0  t  T, x 2 K, y 2 K, 0 < |x y|  }
and
R
2
⇤(T, K) = sup{|h(t, y, x)||y x| : 0  t  T, x 2 K, y 2 K, x 6= y}.
Then for T < 1 and a compact subset K ✓ U , we have
⇤(T, K) < 1
D
and
lim (T, K, ) = 0.
#0
Proof. Fix t 2 [0, 1). For 0  s  1, define

d
X
g(s, y, x) = f (t, x + s(y x)) f (t, x) s (y j xj )fj (t, x)
j=1
d
X
s2
(y j xj )(y k xk )fjk (t, x)
2
j,k=1
where x = (x1 , . . . , xd ), y = (y 1 , . . . , y d ) 2 Rd . Then g(0, y, x) = 0 and g(1, y, x) =

d d2
h(t, y, x). Writing ds g = g 0 and ds 00 0
2 g = g , we can check that g (0, y, x) = 0 and
d
X
g 00 (s, y, x) = (fjk (t, x + s(y x)) fjk (t, x))(y j xj )(y k xk ).
j,k=1
Noting that g(0, y, x) = g 0 (0, y, x) = 0, by Taylor’s theorem (see remainder form given in
equation (4.8.11)) we have
h(t, y, x) =g(1, y, x)
Z 1 (4.8.23)
= (1 s)g 00 (s, y, x)ds.
0
Thus (4.8.22) is satisfied where {gjk } are defined by
Z 1
T
gjk (t, y, x) = (1 s)(fjk (t, x + s(y x)) fjk (t, x))ds. (4.8.24)
0
The desired estimates on h follow from (4.8.22) and (4.8.24).
F
Theorem 4.86. (Ito’s Formula for Continuous Stochastic Integrators) Let f 2
C 1,2 ([0, 1) ⇥ U ) where U ✓ Rd is a convex open set and let Xt = (Xt1 , . . . , Xtd ) be an
U -valued continuous process where each X j is a stochastic integrator. Then
A
Z t d Z t
X
f (t, Xt ) =f (0, X0 ) + f0 (s, Xs )ds + fj (s, Xs )dXsj
0 j=1 0+
Z (4.8.25)
d d
1X X t
R
+ fjk (s, Xs )d[X j , X k ]s .

2 0
j=1 k=1
Proof. Suffices to prove the equality (4.8.25) for a fixed t a.s. since both sides are continuous
D
processes. Once again let tni = ti

n and
d
X
Vin = fj (tni , Xtni )(Xtjn Xtjn )
i+1 i
j=1
d
1 X
Win = fjk (tni , Xtni )(Xtjn Xtjn )(Xtkni+1 Xtkni )
2 i+1 i
j,k=1
Rin = h(tni , Xtni , Xtni+1 )

From the definition of h - (4.8.21) it follows that
f (tni , Xtni+1 ) f (tni , Xtni ) = Vin + Win + Rin (4.8.26)

Now
n
X1
f (t, Xt ) f (0, X0 ) = (f (tni+1 , Xtni+1 ) f (tni , Xtni ))
i=0
n
X1
= (f (tni+1 , Xtni+1 ) f (tni , Xtni+1 ))
i=0
n
X1
+ (f (tni , Xtni+1 ) f (tni , Xtni ))
i=0
n
X1
= (Uin + Vin + Win + Rin )
i=0
in view of (4.8.26), where
Uin =f (tni+1 , Xtni+1 ) f (tni , Xtni+1 )
T
Z tn (4.8.27)
i+1
= f0 (u, Xtni+1 )du
tn
i
and hence, by the dominated convergence theorem for Lebesgue integrals, we have
n
X1
n
Ui !
i=0
Z t
f0 (s, Xs )ds.
F
0
(4.8.28)
A
Using (4.8.8) and (4.8.9), we get (see remark 4.81)
n
X1 X d Z t
n
Vi ! fj (s, Xs )dXsj in probability (4.8.29)
0+
R
i=0 j=1
and
n
X1 d Z
1X t
Win ! fjk (s, Xs )d[X j , X k ]s in probability. (4.8.30)
2 0
i=0 j,k=1
D
In view of these observations, the result, namely (4.8.25) would follow once we show that
n
X1
Rin ! 0 in probability. (4.8.31)
i=0
Now let K t,! = {Xs (!) : 0  s  t} and n (!) = supi |(Xtni+1 (!) Xtni (!))|. Then K t,! is
compact, n (!) ! 0 and hence by Lemma 4.85 for every ! 2 ⌦
(K t,! , n (!)) ! 0. (4.8.32)
Since
|Rin |  (K t,! , n (!))(Xtn
i+1
(!) Xtni (!))2
we have
n
X1 n
X1
|Rin |  (K t,! , n (!)) (Xtni+1 (!) Xtni (!))2 .
i=0 i=0
The first factor above converges to 0 pointwise as seen in (4.8.32) and the second factor
converges to [X, X]t in probability, we conclude that (4.8.31) is true completing the proof
as noted earlier.
Theorem 4.87. (Ito’s Formula for r.c.l.l. Stochastic Integrators) Let U be a convex
open subset of Rd . Let f 2 C 1,2 ([0, 1) ⇥ U ). Let X 1 , . . . , X d be stochastic integrators
Xt := (Xt1 , . . . , Xtd ) is U -valued. Further, suppose X is also U -valued. Then
Z t d Z t
X
0 j=1 0+
T
d d Z
1X X t
+ fjk (s, Xs )d[X j , X k ]s
2 0
j=1 k=1
(4.8.33)
X d
X
+
0<st
{f (s, Xs )
d X
X d
1
F
f (s, Xs )
j=1
fjk (s, Xs )( Xsj )( Xsk )}.

fj (s, Xs ) Xsj
A
2
j=1 k=1
Proof. Let us begin by examining the last term. Firstly, what appears to be a sum of
uncountably many terms is really a sum of countable number of terms- since the summand
R
is zero whenever Xs = Xs . Also, the last term equals

X
Dt = h(s, Xs , Xs ) (4.8.34)
D
0<st
where h is defined by (4.8.21). By Lemma 4.85 for 0 < s  t
|h(s, Xs (!), Xs (!))|  ⇤(K t,! )| Xs (!)|2
where
K t,! = {Xt (!) : 0  t  T } [ {Xt (!) : 0  t  T } (4.8.35)
Here K t,! is compact (see Exercise 2.1) and thus by Lemma 4.85, ⇤(K t,! ) < 1. As a
consequence, we have
X X
|h(s, Xs (!), Xs (!))|  ⇤(K t,! ) ( Xs (!))2
0<st 0<st
and invoking Corollary 4.65 we conclude that series in (4.8.34) converges absolutely, a.s.
The rest of the argument is on the lines of the proof in the case of continuous stochastic
integrators except that this time the remainder term after expansion up to two terms does
not go to zero yielding an additional term. Also, the proof given below requires use of
partitions via stop times.
For each n 1, define a sequence {⌧in : i 1} of stop times inductively as follows:
⌧0n = 0 and for i 0,
n
⌧i+1 = inf{t > ⌧in : max{|Xt X⌧in |, |Xt X⌧in |, |t ⌧in |} 2 n
} (4.8.36)
Let us note that each ⌧in is a stop time (see Theorem 2.44),
0 = ⌧0n < ⌧1n < . . . < ⌧m

n
< ...,
n
T
8n 1, ⌧m " 1 as m ! 1
and
n
(⌧i+1 ⌧in )  2 n
.
n : m
Thus, {⌧m 0}, n F
1 satisfies the conditions of Lemma 4.80.
Fix t > 0. On the lines of the proof in the continuous case let
A
Ani = f (⌧i+1
n
^ t, X⌧i+1
n ^t ) f (⌧in ^ t, X⌧i+1
n ^t )
d
X
Vin = fj (⌧in ^ t, X⌧in ^t )(X⌧j n X⌧j n ^t )
i+1 ^t i
j=1
R
d
1 X
Win = fjk (⌧in ^ t, X⌧in ^t )(X⌧j n ^t X⌧j n ^t )(X⌧ki+1
n ^t X⌧kin ^t )
2 i+1 i
j,k=1
D
Rin = h(⌧in ^ t, X⌧i+1

n ^t , X⌧ n ^t )
i
Then
n
f (⌧i+1 ^ t, X⌧i+1
n ^t ) f (⌧in ^ t, X⌧in ^t ) = Ani + Vin + Win + Rin
and hence
1
X
f (t, Xt ) f (0, X0 ) = (Ani + Vin + Win + Rin ). (4.8.37)
i=0
Now,
1
X 1 Z
X n ^t
⌧i+1
Ani = f0 (s, X⌧i+1
n ^t )ds
i=0 i=0 ⌧in ^t

and hence for all ! Z

1
X t
Ani (!) ! f0 (s, Xs (!))ds
i=0 0
Since for every !, Xs (!) = Xs (!) for all but countably many s, we can conclude
X1 Z t
n
Ai ! f0 (s, Xs )ds in probability. (4.8.38)
i=0 0
By Lemma 4.80 and the remark following it,

X1 Xd Z t
Vin ! fj (s, Xs )dXsj (4.8.39)
i=0 j=1 0+
and
1
X d d Z
1 XX t
Win ! fjk (s, Xs )d[X j , X k ] (4.8.40)
T
2 0
i=0 j=1 k=1
in probability. In view of (4.8.37)-(4.8.40), and Rin = h(⌧in ^ t, X⌧i+1

n ^t , X⌧ n ^t ), to complete
i
the proof of the result it suffices to prove
Rn =
1
X
i=0
h(⌧in ^ t, X⌧i+1
F
n ^t , X⌧ n ^t ) !
i
X
0<st
h(s, Xs , Xs ). (4.8.41)
A
Let us partition indices i into three sets: h(⌧in ^ t, X⌧i+1
n ^t , X⌧ n ^t ) is zero, is small and is
i
large as follows:
H n (!) ={i n
0 : ⌧i+1 (!) ^ t = ⌧in (!) ^ t}
R
E n (!) ={i 62 H n : | X⌧i+1

n ^t (!)|  2 · 2
n
}
F n (!) ={i 62 H n : | X⌧i+1
n ^t (!)| > 2 · 2
n
}.
For i 2 H n (!), |h(⌧in (!) ^ t, X⌧i+1
n ^t (!), X⌧ n ^t (!))| = 0 and thus writing
D
i
X
B n (!) = h(⌧in (!) ^ t, X⌧i+1
n ^t (!), X⌧ n ^t (!)),
i
i2E n (!)
X
C n (!) = h(⌧in (!) ^ t, X⌧i+1
n ^t (!), X⌧ n ^t (!))
i
i2F n (!)
we observe that
Rn = B n + C n .
Note that for any j if u, v 2 (⌧jn , ⌧j+1

n ), then |X
u Xv |  2.2 n as Xu , Xv are within
n n n ), |X
2 distance from X⌧jn . As a result, for any v 2 (⌧j , ⌧j+1 Xv |  2.2 n . Thus, if
v
| Xs (!)| > 2·2 n for s 2 (0, t], then s must equal ⌧jn (!) ^ t for some j with i = j 1 2 F n .
i.e.
if s 2 (0, t] and | Xs (!)| > 2 · 2 n then s = ⌧i+1
n
^ t for i 2 F n (!). (4.8.42)
Hence for i 2 E n (!),
|X⌧i+1
n ^t (!) X⌧in ^t (!)| |(X )⌧i+1
n ^t (!) X⌧in ^t (!)| + | X⌧i+1
n ^t (!)|
n
3 · 2
and hence
X
|B n (!)|  |h(⌧in (!) ^ t, X⌧i+1
n ^t (!), X⌧ n ^t (!))|
i
i2E n (!)
X
 (K t,! , 3 · 2 n
) |X⌧i+1
n ^t (!) X⌧in ^t (!)|2
i
P
where K t,! defined by (4.8.35) is compact. Since i |X⌧i+1 ^t X⌧in ^t |2 converges to
T
n
P j j t,! , 3 · 2 n ) ! 0 for all !, invoking Lemma 4.85 it
j [X , X ]t in probability and (K
follows that
B n ! 0 in probability.
Cn !
F
Thus to complete the proof of (4.8.41), it would suffice to show that
X
h(s, Xs , Xs ) in probability. (4.8.43)
A
0<st
Let G(!) = {s 2 (0, t] : | Xs (!)| > 0}. Since X is an r.c.l.l. process, G(!) is a countable
set for every !. Fix ! and for s 2 G(!), define
X
R
ans (!) := h(⌧in (!) ^ t, X⌧i+1

n (!)^t , X⌧ n ^t (!))1{⌧ n (!)^t=s} .
i i+1
i2F n (!)
Then
X X
C n (!) = h(⌧in ^ t(!), X⌧i+1
n ^t (!), X⌧ n ^t (!)) = ans (!).
D
i
i2F n (!) s2G(!)
If | Xs (!)| > 2 · 2 n,
then ans (!) = h(⌧in (!) ^ t, Xs (!), X⌧in ^t (!)) n (!) ^ t (as
with s = ⌧i+1
seen in (4.8.42)) and hence
ans (!) ! h(s, Xs (!), Xs (!)) for all !. (4.8.44)
For i 2 F n (!),
|X⌧i+1
n ^t (!) X⌧in ^t (!)| |(X )⌧i+1
n ^t (!) X⌧in ^t (!)| + | X⌧i+1
n ^t (!)|
n
2 + | X⌧i+1
n ^t (!)|
2| X⌧i+1
n ^t (!)|
Thus if |ans (!)| = n (!) ^ t for some i 2 F n (!) and then

6 0, then s = ⌧i+1
|ans (!)| ⇤(K t,! )|X⌧i+1

n ^t (!) X⌧in ^t (!)|2
4⇤(K t,! )| X⌧i+1
n ^t (!)|
2 (4.8.45)
=4⇤(K t,! )| Xs (!)|2 .
Let Cs (!) = 4⇤(K t,! )| Xs (!)|2 . Then
X X
Cs (!) = 4⇤(K t,! ) | Xs (!)|2
s s
and hence by Corollary 4.65
X
Cs (!) < 1 a.s.
s
Using Weierstrass’s M -test (series version of the dominated convergence theorem) along
T
with |ans (!)|  Cs (!) (recall (4.8.44)), we get
X X
C n (!) = ans (!) ! h(s, Xs (!), Xs (!)) a.s. (4.8.46)
s2G(!) s2G(!)
bility. This completes the proof.

F
We have proved that the convergence in (4.8.43) holds almost surely and hence in proba-
Corollary 4.88. Let f , X be as in Theorem 4.87. Then Zt = f (t, Xt ) is a stochastic

A
integrator.
Proof. In the Ito formula (4.8.33) that expresses f (t, Xt ), it is clear that the terms involving
R
integral are stochastic integrators. We had seen that the last term is
X
Dt = h(s, Xs Xs )
0<st
D
h is defined by (4.8.21). By Lemma 4.85
|h(s, Xs (!), Xs (!))|  ⇤(K t,! )| Xs (!)|2
for 0 < s  t, where
K t,! = {Xs (!) : 0  s  t} [ {Xs (!) : 0  s  t}.
Hence
Var[0,T ] (D)(!)  ⇤(K T,! )[X, X]T .
Thus D is a process with finite variation and hence is a stochastic integrator, completing
the proof.
We have seen earlier in Lemma 4.65 that [X, Y ]t = ( X)t ( Y )t . Thus carefully
examining the right hand side of the Ito formula (4.8.33), we see that we are adding and
subtracting a term
Xd X d
1
fjk (s, Xs )( Xsj )( Xsk ).
2
j=1 k=1
Let us introduce - for now in an ad-hoc manner [X, Y ](c) for semimartingales X, Y :
(c)
X
[X, Y ]t = [X, Y ]t ( X)s ( Y )s . (4.8.47)
0<st
Later we will show that this is the cross-quadratic variation of continuous martingale parts
of X and Y (See Theorem 8.76). For now we observe the following.
Lemma 4.89. Let X, Y be semimartingales and h be a locally bounded predictable process.
T
Then [X, Y ](c) is a continuous process and further
Z Z X
(c)
hd[X, Y ] = hd[X, Y ] hs ( X)s ( Y )s . (4.8.48)
F 0<st
Proof. Continuity of [X, Y ](c) follows from its definition (4.89) and part (iii) of Lemma
4.65. The identity (4.8.48) for simple functions h 2 S follows by direct verification and
A
hence follows for all bounded predictable processes by monotone class theorem.
R
Using Lemma 4.89, we can recast the Ito formula in an alternate form
Theorem 4.90. Ito’s formula for r.c.l.l. stochastic integrators

Let U be a convex open subset of Rd . Let f 2 C 1,2 ([0, 1)⇥U ). Let X 1 , . . . , X d be stochastic
D
integrators Xt := (Xt1 , . . . , Xtd ) is U -valued. Further, suppose X is also U -valued. Then

Z t Xd Z t
0 j=1 0+
d d Z
1X X t
+ fjk (s, Xs )d[X j , X k ](c) (4.8.49)
2 0+
j=1 k=1
X d
X
+ {f (s, Xs ) f (s, Xs ) fj (s, Xs ) Xsj }.
0<st j=1
Exercise 4.91. Let S be a (0, 1)-valued continuous stochastic integrator. Show that Rt =
(St ) 1 is also a stochastic integrator and
Z t Z t
2
Rt = R0 (Ss ) dSs + (Ss ) 3 d[S, S]s .
0+ 0+
Exercise 4.92. Let S be a (0, 1)-valued r.c.l.l. stochastic integrator with St > 0 for t > 0.
Show that Rt = (St ) 1 is also a stochastic integrator and
Z t Z t X
2
Rt = R0 (Ss ) dSs + (Ss ) 3 d[S, S](c)
s + u(Ss , Ss )
0+ 0+ 0<st
1 1
where u(y, x) = y x + (y x) x12 .
1
Exercise 4.93. Let X be a continuous stochastic integrator and let St = exp(Xt 2 [X, X]t ).
T
(i) Show that S satisfies
Z t
St = exp(X0 ) + Su dXu . (4.8.50)
0+
(ii) Let Z satisfy

F
Hint: Apply Ito formula for f (X, [X, X]) for suitable function f .
Z t
A
Zt = exp(X0 ) + Zu dXu . (4.8.51)
0+
Show that Z = S.
Hint: Let Yt = Zt exp( Xt + 12 [X, X]t ) and applying Ito formula, conclude that Yt =
R
Y0 = 1.
(iii) Show that

Z t
D
Xt = X0 + Su 1 dSu .
0+
(iv) Let Rt = (St ) 1. Show that R satisfies

Z t Z t
1 1 1
Rt = (S0 ) (Su ) dXu + (Su ) d[X, X]u (4.8.52)
0+ 0+
which in turn is same as (see also Exercise 4.91)

Z t Z t
1 2 3
Rt = (S0 ) (Su ) dSu + (Su ) d[S, S]u . (4.8.53)
0+ 0+
1
Hint: Use part (i) above and Rt = exp(Yt 2 [Y, Y ]t ) where Yt = Xt + [X, X]t .
4.9. The Emery Topology 145
Exercise 4.94. Let X, Y be a (0, 1)-valued continuous stochastic integrators and let U, V
be solutions to Z t
Ut = exp(X0 ) + Uu dXu (4.8.54)
0+
and Z t
Vt = exp(Y0 ) + Vu dYu . (4.8.55)
0+
Let Wt = Ut Vt . Show that W is the unique solution to
Z t Z t Z t
Wt = exp(X0 Y0 ) + Wu dXu + Wu dYu + Wu d[X, Y ]u . (4.8.56)
0+ 0+ 0+
4.9 The Emery Topology

On the class of stochastic integrators, we define a natural metric dem as follows. Let S1
T
be the class of simple predictable processes f such that |f |  1. For stochastic integrators
X, Y , let Z Z
dem (X, Y ) = sup{ducp ( f dX, f dY ) : f 2 S1 } (4.9.1)
F
Easy to see that dem is a metric on the class of stochastic integrators. This metric was
defined by Emery [16] and the induced topology is called the Emery topology. If X n
em
A
converges to X in dem metric, we will write it as X n ! X. Taking f = 1 in (4.9.1), it
follows that
ducp (X, Y )  dem (X, Y ) (4.9.2)
R
and thus convergence in Emery topology implies convergence in ducp metric. If A is an

increasing process, then it is easy to see that dem (A, 0)  ducp (A, 0) and hence we have
dem (A, 0) = ducp (A, 0). (4.9.3)
D
Let us define a metric dvar on V as follows: for B, C 2 V

dvar (B, C) = ducp (Var(B C), 0). (4.9.4)
Lemma 4.95. Let B, C 2 V. Then

dem (B, C)  dvar (B, C).
Proof. Note that for any predictable f with |f |  1

Z T Z T
| f dB f dC|  Var[0,T ] (B C).
0 0
The result follows from this observation.
As a consequence of (2.5.2)-(2.5.3), it can be seen that dem (X n , X) ! 0 if and only if

for all T > 0, > 0
Z t Z t
lim [ sup P( sup | f dX n f dX| > )] = 0 (4.9.5)
n!1 f :2S 0tT 0 0
1
and likewise that {X n }is Cauchy in dem is and only if for all T > 0, > 0
Z t Z t
n
lim [ sup P( sup | f dX f dX k | > )] = 0. (4.9.6)
n,k!1 f :2S1 0tT 0 0
Theorem 4.96. For a bounded predictable process f with |f |  1 one has

Z Z
ducp ( f dX, f dY )  dem (X, Y ). (4.9.7)
Proof. Let K1 be the class of bounded predictable processes for which (4.9.7) is true. Then
T
using the dominated convergence theorem and the definition of ducp , it follows that K1 is
closed under bp-convergence and contains S1 .
Let K be the class of bounded predictable processes g such that g̃ = max(min(g, 1), 1) 2
K1 . Then it is easy to see that K is closed under bp-convergence and contains S. Thus K
F
is the class of all bounded predictable processes g and hence K1 contains all predictable
processes bounded by 1.
A
Corollary 4.97. If Xn , X are semimartingales such that dem (X n , X) ! 0 then for all
T > 0, > 0 Z t Z t
lim [ sup P( sup | f dX n f dX| > )] = 0 (4.9.8)
R
n!1 f :2K 0tT 0 0

1
where K1 is the class of predictable processes bounded by 1.
Linearity of the stochastic integral and the definition of the metric dem yields the
D
inequality
dem (U + V, X + Y )  dem (U, X) + dem (V, Y )
em em em
which in turn implies that if X n ! X and Y n ! Y then (X n + Y n ) ! (X + Y ).
We will now prove an important property of the metric dem .
Theorem 4.98. The space of stochastic integrators is complete under the metric dem .
Proof. Let {X n } be a Cauchy sequence in dem metric. Then by (4.9.2) it is also cauchy
in ducp metric and so by Theorem 2.68 there exists an r.c.l.l. adapted process X such that
ucp em
X n ! X. We will show that X is a stochastic integrator and X n ! X.
Let an = supk 1 dem (X n , X n+k ). Then an ! 0 since X n is cauchy in dem . For

R
e P), consider Y n (f ) = f dX n . Then (in view of (4.9.7)) for bounded predictable
f 2 B(⌦,
f with |f |  c, we have
ducp (Y n (f ), Y n+k (f ))  c an , for all f, k 1 (4.9.9)
and hence for bounded predictable processes f , {Y n (f )} is Cauchy in ducp and hence by
Theorem 2.68, Y n (f ) converges to say Y (f ) 2 R0 (⌦, (F⇧ ), P) and
ducp (Y n (f ), Y (f ))  can , for all predictable f, |f |  c. (4.9.10)
For simple predictable f , we can directly verify that Y (f ) = JX (f ). We will show
ucp bp
(using the standard 3" ) argument that Y (f m ) ! Y (f ) if f m ! f and {f m } are uni-
formly bounded. Y (f ) would then be the required extension in the definition of stochastic
bp
integrator proving that X is a stochastic integrator. Let us fix f m ! f where {f m } are
T
uniformly bounded. Dividing by the uniform upper bound if necessary, we can assume that
|f m |  1. We wish to show that ducp (Y (f m ), Y (f )) ! 0 as m ! 1.
Given " > 0, first choose and fix n⇤ such that an⇤ < 3" . Then
⇤
⇤
F ⇤
+ ducp (Y n (f ), Y (f ))
⇤
 an⇤ + ducp (Y n (f m ), Y n (f )) + an⇤
⇤ ⇤
ducp (Y (f m ), Y (f ))  ducp (Y (f m ), Y n (f m )) + ducp (Y n (f m ), Y n (f ))
(4.9.11)
A
" ⇤ ⇤ "
 + ducp (Y n (f m ), Y n (f )) + .
3 3
m bp m
R m n ⇤ ucp R ⇤
Since f ! f and {f } is bounded by 1, f dX ! f dX n and hence we can
R
choose m⇤ (depends upon n⇤ which has been chosen and fixed earlier) such that for m m⇤
one has
⇤ ⇤ "
ducp (Y n (f m ), Y n (f )) 
3
D
and hence using (4.9.11) we get for m m⇤ ,

ducp (Y (f m ), Y (f ))  ".
R
Thus, Y (f ) is the required extension of { f dX : f 2 S} proving that X is a stochastic
integrator and Z
Y (f ) = f dX.
R
Recalling that Y n (f ) = f dX n , the equation (4.9.10) implies
dem (X n , X)  an
with an ! 0. This completes the proof of completeness of dem .
We will now strengthen the conclusion in Theorem 4.46 by showing that the convergence
is actually in the Emery topology.
ucp
Theorem 4.99. Suppose Y n , Y 2 R0 (⌦, (F⇧ ), P), Y n ! Y and X is a stochastic inte-
grator. Then Z Z
em
(Y n ) dX ! Y dX.
R R
Proof. As noted in Thoerem 4.29, (Y n ) dX and Y dX are stochastic integrators.
Further, we need to show that we need to show that for T < 1, > 0
Z t Z t
n
lim [ sup P( sup | (Y ) f dX Y f dX| > )] = 0. (4.9.12)
n!1 f :2S 0tT 0 0
1
We will prove this by contradiction. Suppose (4.9.12) is not true. Then there exists an "
and a subsequence {nk } such that
T
Z t Z t
nk
sup P( sup | (Y ) f dX Y f dX| > ) " 8k 1. (4.9.13)
f :2S1 0tT 0 0
2 S1 such that
For each k get fk
Z t
k
P( sup | (Y n ) f k dX
0tT 0
F Z
0
t
Y f k dX| > ) ". (4.9.14)
A
k ucp
Now let g k = (Y n Y ) f k . Since Y n ! Y and f k are uniformly bounded by 1, it
ucp
follows that g k ! 0 and hence by Theorem 4.46,
Z t Z t
nk k
P( sup | (Y ) f dX Y f k dX| > ) ! 0.
R
0tT 0 0
This contradicts (4.9.14). This proves (4.9.12).

D
We will first prove a lemma and then go on to the result mentioned above.
Lemma 4.100. Suppose U n 2 R0 (⌦, (F⇧ ), P) be such that
sup sup |Usn |  Ht

n 1 0st
where H 2 R0 (⌦, (F⇧ ), P) is an increasing process. Let X n , X be stochastic integrators such

em R R em
that X n ! X. Let Z n = (U n ) dX n and W n = (U n ) dX. Then (Z n W n ) ! 0.
Proof. Note that in view of Theorem 4.29 for bounded predictable f

Z t Z t Z Z
n n n n
f dZ f dW = (U ) f dX (U n ) f dX.
0 0
So we need to show that (see (4.9.7)) for T < 1, > 0 and " > 0
Z t Z t
sup P( sup | (U n ) f dX n (U n ) f dX| > ) < ". (4.9.15)
f :2S1 0tT 0 0
Recall, S1 is the class of predictable processes that are bounded by 1.
First, get < 1 such that
"
P(HT > ) 
2
and let a stop time be defined by
= inf{t > 0 : Ht or Ht } ^ (T + 1).
Then we have
"
P( < T ) = P(HT > ) 
2
and for f 2 S1 writing hn = (U n ) f 1 1[0, ] we see that
T
Z t Z t
n n
P( sup | (U ) f dX (U n ) f dX| > ) (4.9.16)
0tT 0 0
Z t Z t
n n
P( sup | (U ) f dX (U n ) f dX| > ) + P( < T )
0t ^T
P( sup |
0t ^T
Z
0
0
t
n
h dX n
ZF 0
t
0
hn dX| >
"
)+ .
2
A
em
Xn !
Finally, since X, for the choice of 0 = and "0 = 2" invoking Corollary 4.97
get n0 such that for n n0 one has
Z t Z t
n "
R
sup P( sup | gdX gdX| > ) 

g2K1 0tT 0 0 2
where K1 is the class of predictable processes bounded by 1. Since hn 2 K1 , using (4.9.16)
it follows that Z t Z t
D
n n
P( sup | (U ) f dX (U n ) f dX| > ) < ".
0tT 0 0
Note that the choice of and n0 did not depend upon f 2 K1 and hence (4.9.15) holds
completing the proof.
Here is our main result that connects convergence in the Emery topology and stochastic
integration.
ucp
Theorem 4.101. Let Y n , Y 2 R0 (⌦, (F⇧ ), P) be such that Y n ! Y and let X n , X be
em R R
stochastic integrators such that X n ! X. Let Z n = (Y n ) dX n and Z = Y dX.
em
Then Z n ! Z.
Proof. We have seen in Theorem 4.99 that

Z Z
n em
(Y ) dX Y dX ! 0.
Thus suffices to prove that

Z Z
n n em
(Y ) dX (Y n ) dX ! 0. (4.9.17)
R R
Let bn = dem ( (Y n ) dX n , (Y n ) dX). To prove that bn ! 0 suffices to prove the
following: (see proof of Theorem 4.46) For any subsequence {nk : k 1}, there exists
a further subsequence {mj : j 1} of {nk : k 1} (i.e. there exists a subsequence
{kj : j 1} such that mj = nkj ) such that
Z Z
bmj = dem ( (Y mj ) dX mj , (Y mj ) dX) ! 0.
So now, given a subsequence {nk : k 1}, using ducp (Y nk , Y ) ! 0, let us choose mj = nkj
T
with kj+1 > kj and ducp (Y mj , Y )  2 j for each j 1. Then as seen earlier, this would
imply
1
X m
Thus defining
1
X
F
[sup|Yt j Yt |] < 1, 8T < 1.
j=1 tT
A
mj
Ht = sup [ |Ys Ys | + |Ys |]
0st j=1
we have that H is an r.c.l.l. process and |Y mj |  H. Then by Lemma 4.100, it follows that
Z Z
R
mj mj em
(Y ) dX (Y mj ) dX ! 0.
This proves (4.9.17) completing the proof of the Theorem.

D
Essentially the same arguments also proves the following:

ucp
Proposition 4.102. Let Y n , Y 2 R0 (⌦, (F⇧ ), P) be such that Y n ! Y and let X n , X 2 V
R R
be such that dvar (X n , X) ! 0. Let Z n = (Y n )dX n and Z = Y dX. Then
dvar (Z n , Z) ! 0.
In particular,
dem (Z n , Z) ! 0.
We will now show that X 7! [X, X] and (X, Y ) 7! [X, Y ] are continuous mappings in
the Emery topology.
em em
Theorem 4.103. Let X n , X, Y n , Y be stochastic integrators such that X n ! X, Y n !
Y . Then
dvar ([X n , Y n ], [X, Y ]) ! 0 (4.9.18)
and as a consequence
em
[X n , Y n ] ! [X, Y ]. (4.9.19)
Proof. Let U n = X n X. Then dem (U n , 0) ! 0 implies that ducp (U n , 0) ! 0 and hence as

ucp R ucp
noted earlier in Proposition 4.48 (U n )2 ! 0. Also, by Theorem 4.101, (U n ) dU n ! 0.
Since Z
[U n , U n ] = (U n )2 2 (U n ) dU n ,
ucp
it follows that [U n , U n ] ! 0 and so
T
dvar ([X n X, X n X]) ! 0. (4.9.20)
Now, (4.6.17) gives

p
and hence [U n , U n ]
ucp
Var[0,T ] ([U n , Z]) 
F [U n , U n ]T [Z, Z]T
! 0 implies that for all stochastic integrators Z

A
dvar ([U n , Z], 0) ! 0.
Since U n = X n X, one has [U n , Z] = [X n , Z] [X, Z] and so
dvar ([X n , Z], [X, Z]) ! 0. (4.9.21)

R
Noting that
[X n , X n ] = [X n X, X n X] + 2[X n , X] [X, X]
D
we conclude using (4.9.20) and (4.9.21) that
dvar ([X n , X n ], [X, X]) ! 0. (4.9.22)
Now the required relation (4.9.18) follows from (4.9.22) by polarization identity (4.6.6).
The following result is proven on similar lines.

em em
Theorem 4.104. Let X n , X, Y n , Y be stochastic integrators such that X n ! X, Y n !
Y . Then
dvar (j(X n , Y n ), j(X, Y )) ! 0. (4.9.23)
Proof. As seen in (4.6.11)

j(X n X, X n X)t  [X n X, X n X]t
and hence by Theorem 4.103,
dvar (j(X n X, X n X), 0) ! 0.
Now proceeding as in the proof of Theorem 4.103, we can first prove that for all stochastic
integrators Z,
dvar (j(X n , Z), j(X, Z)) ! 0.
Once again, noting that

j(X n , X n ) = j(X n X, X n X) + 2j(X n , X) j(X, X)
we conclude that
T
dvar (j(X n , X n ), j(X, X)) ! 0.
The required result, namely (4.9.23) follows from this by polarization identity (4.6.12).
F
Next we will prove that (Xt ) 7! (f (t, Xt )) is a continuous mapping in the Emery
topology for smooth functions f . Here is a Lemma that would be needed in the proof.
Lemma 4.105. Let X n , Y n be stochastic integrators such that X n ! X, Y n

em em
! Y.
A
ucp
Suppose Z n is a sequence of r.c.l.l. processes such that Z n ! Z. Let
X
Ant = Zsn ( X n )s ( Y n )s
0<st
R
X
At = Zs ( X)s ( Y )s .
0<st
Then dvar (An , A) ! 0.

D
Proof. Note that writing B n = j(X n , Y n ) and B = j(X, Y ), we have

Z Z
n n n
A = Z dB , A = ZdB.
We have seen in (4.9.23) that dvar (B n , B) ! 0. The conclusion now follows from Propo-
sition 4.102.
Theorem 4.106. Let X (n) = (X 1,n , X 2,n , . . . , X d,n ) be a sequence of Rd -valued r.c.l.l.
processes such that X j,n are stochastic integrators for 1  j  d, n 1. Let
em
X j,n ! X j , 1  j  d.
Let f 2 C 1,2 ([0, 1) ⇥ Rd ). Let

(n)
Ztn = f (t, Xt ), Zt = f (t, Xt )
em
where X = (X 1 , X 2 , . . . , X d ), Then Z n ! Z.
Proof. By Ito’s formula, (4.87), we can write

Ztn = Z0n + Ant + Ytn + Btn + Vtn , Zt = Z0 + At + Yt + Bt + Vt
where
Z t
Ant = f0 (s, Xs(n) )ds
0
Z t
At = f0 (s, Xs )ds
0
d Z t
X (n)
T
Ytn = fj (s, Xs )dXsj,n
j=1 0+
d Z
X t
Yt = fj (s, Xs )dXsj
Btn =
2
j=1
1X X
d
j=1 k=1
0+
d Z t
0+
F (n)
fjk (s, Xs )d[X j,n , X k,n ]s
A
d d Z
1X X t
Bt = fjk (s, Xs )d[X j , X k ]s
2 0
j=1 k=1
X (n)
R
n
V = h(s, Xs(n) , Xs )
0<st
X
V = h(s, Xs , Xs ).
0<st
D
By continuity of f0 , fj , fjk (the partial derivatives of f (t, x) w.r.t. t, xj and xj , xk respec-

tively), and Proposition 4.48 we have
(n) ucp
f0 (·, X· ) !f0 (·, X· );
(n) ucp
fj (·, X· ) !fj (·, X· ), 1  j  d;
(n) ucp
fjk (·, X· ) !fjk (·, X· ), 1  j, k  d.
em em
Also, X (n) ! X implies that for all j, k, 1  j, k  d, [X j,n , X k,n ] ! [X j , X k ] as seen
in (4.9.19), Theorem 4.103. Thus, by Theorem 4.101, it follows that
em em em
An ! A, Y n ! Y, B n ! B. (4.9.24)
If X n , X were continuous processes so that V n , V are identically equal to zero and the
result follows from (4.9.24). For the r.c.l.l. case, recall that h can be expressed as
d
X
h(t, y, x) = gjk (t, y, x)(y j xj )(y k xk )
j,k=1
where gjk are defined by (4.8.24). Thus,

d
X X (n)
Vn = gjk (s, Xs(n) , Xs )( X j,n )s ( X k,n )s ,
j,k=1 0<st
d
X X
V = gjk (s, Xs , Xs )( X j )s ( X k )s .
j,k=1 0<st
em
Now Lemma 4.105 implies that dvar (V n , V ) ! 0 and as a consequence, V n ! V .
em
T
Now combining this with (4.9.24) we finally get Z n ! Z.
Essentially the same proof (invoking Proposition 4.48) would yield the slightly stronger
result:
F
Theorem 4.107. Let X (n) = (X 1,n , X 2,n , . . . , X d,n ) be a sequence of Rd -valued r.c.l.l.
processes such that X j,n are stochastic integrators for 1  j  d, n 1 such that
A
em
X j,n ! X j , 1  j  d.
Let X = (X 1 , X 2 , . . . , X d ). Let f n , f 2 C 1,2 ([0, 1)⇥Rd ) be functions such that f n , f0n , fjn , fjk
n
converge to f, f0 , fj , fjk (respectively) uniformly on compact subsets of [0, 1) ⇥ Rd , where

R
f0n , f0 are derivatives in the t variable of f n = f n (t, x), f = f (t, x) respectively; fjn , fj
are derivatives in xj and fjk n ,f n n
jk are derivatives in xj , xk of f = f (t, x), f = f (t, x)
respectively with x = (x1 , . . . xd ). Let
D
(n)
Ztn = f n (t, Xt ), Zt = f (t, Xt ).
em
Then Z n ! Z.
4.10 Extension Theorem

We have defined stochastic integrator as an r.c.l.l. process X for which JX defined by
e P) satisfying (4.2.3). Indeed, just
(4.2.1), (4.2.2) for f 2 S admits an extension to B(⌦,
assuming that JX satisfies
bp ucp
f n ! 0 implies JX (f n ) !0 (4.10.1)
4.10. Extension Theorem 155
it can be shown that JX admits a required extension. The next exercise gives steps to
construct such an extension. The steps are like the usual proof of Caratheodory extension
theorem from measure theory. This exercise can be skipped on the first reading.
Exercise 4.108. Let X be an r.c.l.l. adapted process. Let JX (f ) be be defined by (4.2.1),

(4.2.2) for f 2 S. Suppose X satisfies
bp ucp
f n 2 S, f n ! 0 implies JX (f n ) ! 0. (4.10.2)
For f 2 S let
X (f ) = sup{ducp (JX (g), 0) : |g|  |f |} (4.10.3)
e P), let
and for ⇠ 2 B(⌦,
1
X 1
X
⇤ n n
X
(⇠) = inf{ X (g ) : g 2 S, |⇠|  |g n |}. (4.10.4)
T
n=1 n=1
Let
e P) : 9f m 2 S s.t.
A = {⇠ 2 B(⌦, ⇤
(⇠ f m ) ! 0}
X
bp
(i) Let f n , f 2 S be such that f n ! f . Show that
bp
f n ! f implies JX (f n )
F ucp
! JX (f ). (4.10.5)
A
(ii) Let f, f 1 , f 2 2 S and c 2 R. Show that
X (f ) = X (|f |). (4.10.6)

(cf ) = |c| (|f |). (4.10.7)
R
X X
1 2 1 2
|f |  |f | ) X (f )  X (f ). (4.10.8)
X (f 1 + f 2 )  X (f 1 ) + X (f 2 ). (4.10.9)
D
e P)
(iii) Show that for ⇠1 , ⇠2 2 B(⌦,
⇤ ⇤ ⇤
X
(⇠1 + ⇠2 )  X
(⇠1 ) + X
(⇠2 ).
(iv) Show that A is a vector space.

bp
(v) Let f n 2 S for n 1 be such that f n ! 0. Show that
X (f n ) ! 0. (4.10.10)
bp
(vi) Let hn , h 2 S for n 1 be such that and hn ! h Show that
X (hn ) ! X (h). (4.10.11)

(vii) Let f n 2 S be such that f n  f n+1  K for all n, where K is a constant. Show that
8✏ > 0 9n⇤ such that for m, n n⇤ , we have
X (f m f n ) < ✏. (4.10.12)
[Hint: Prove by contradiction. If not true, get ✏ > and subsequences {nk }, {mk } both
increasing to 1 such that
k k
X (f n fm ) ✏ 8k 1.
k k bp
Observe that g k defined by g k = f n f m satisfy g k ! 0.]
e P)
(viii) For ⇠ 1 , ⇠ 2 2 B(⌦,
⇤ ⇤
|⇠ 1 |  |⇠ 2 | ) X
(⇠ 1 )  X
(⇠ 2 ). (4.10.13)
e P) be such that ⇠ = P1 |⇠ j |. Then

(ix) Let ⇠ j , ⇠ 2 B(⌦,
T
j=1
1
X 1
X
⇤ ⇤
X
( ⇠j )  X
(⇠ j ). (4.10.14)
j=1 j=1
(x) Let g 2 S and f n 2 S, n 1 satisfy
|g| 
F 1
X
|f n |. (4.10.15)
A
n=1
Show that
1
X
X (|g|)  X (|f k |). (4.10.16)
k=1
R
Pn bp
[Hint: Let g n = min(|g|, k=1 |f
k |) and note that g n ! |g|.]
(xi) For f 2 S show that

D
⇤
X
(f ) = X (f ). (4.10.17)
(xii) For f 2 S show that

⇤
⇤(JX (f ))  X
(f ). (4.10.18)
e P) is such that |⇠|  K, then for each m

(xiii) Let hm = 1[0,m] . If ⇠ 2 B(⌦, 1 show that
⇤
X
(⇠)  X (K|hm |) + 2 m+1
. (4.10.19)
e P) and let aj 2 R be such that aj ! 0. Show that

(xiv) Let ⇠ 2 B(⌦,
⇤
lim X
(aj ⇠) = 0. (4.10.20)
j!1
4.10. Extension Theorem 157
e P) for n
(xv) Let ⇠, ⇠ n 2 B(⌦, 1 be such that ⇠ n ! ⇠ uniformly. Show that
⇤
lim X
(⇠ n ⇠) = 0. (4.10.21)
n!1
e P) and ⇠ n 2 A be such that limm!1

(xvi) Let ⇠ 2 B(⌦, ⇤ (⇠ m ⇠) = 0. Show that ⇠ 2 A.
X
(xvii) Let ⇠ n 2 A be such that ⇠ n  ⇠ n+1 8n 1 be such that

e P).
⇠ = lim ⇠ n 2 B(⌦, (4.10.22)
n!1
(a) Given ✏0 > 0, show that 9g m 2 S such that g n  g n+1 8n 1 and ⇤ (g n

X
⇠ n )  ✏0 .
(b) Given ✏ show that 9n⇤ such that for n, m n⇤ we have
⇤
X
(⇠ m ⇠ n ) < ✏.
[Hint : Use (a) above along with (vii).]
T
(c) For k 1 show that 9nk such that nk > nk 1 (here n0 = 1) and
⇤ k k 1
X
(⇠ n ⇠n )<2 k
.
(d) Show that

⇤
X
(⇠ nk
⇠ )
m=k
1
X F ⇤
X
(⇠ n
m+1 m
⇠n )  2 k+1
. (4.10.23)
A
(e) Show that ⇠ 2 A.
(f) Show that ⇤ (⇠ ⇠ n ) ! 0.
X
[Hint: Use (d) above to conclude that every subsequence of an = ⇤ (⇠ ⇠ n ) has a

R
further subsequence converging to 0.]

e P).
(xviii) Show that A = B(⌦,
D
[Hint: Use Monotone Class Theorem 2.61].

e P) be a sequence such that ⌘ n
(xix) Let ⌘ n 2 B(⌦, ⌘ n+1 0 for all n with limn ⌘ n = 0.
Show that
⇤ n
(⌘ ) ! 0.
[Hint: Let ⇠ n = ⌘ 1 ⌘ n and use (f ) above].
bp
e P) be such that f n ! f . Show that
(xx) Let f n , f 2 B(⌦,
⇤
(f n f ) ! 0. (4.10.24)
[Hint: Let g n = supm n |f
m f |. Then use g n # 0 and |f m f |  g m .]
e P) be such that f n bp
(xxi) Let f n , f 2 B(⌦, ! f . Show that JX (f n ) is Cauchy in ducp -metric.
(xxii) Show that X is a stochastic integrator.
T
F
A
R
D
Chapter 5
Semimartingales
The reader would have noticed that in the development of stochastic integration in the
T
previous chapter, we have not talked about either martingales or semi martingales.
A semimartingale is any process which can be written as a sum of a local martingale
and a process with finite variation paths.
F
The main theme of this chapter is to show that the class of stochastic integrators is the
same as the class of semimartingales, thereby showing that stochastic integral is defined
for all semimartingales and the Ito formula holds for them. This is the Dellacherie-Meyer-
A
Mokobodzky-Bichteler Theorem.
Traditionally, the starting point for integration with respect to square integrable mar-
tingales is the Doob-Meyer decomposition theorem. We follow a di↵erent path, proving
that for a square integrable martingale M , the quadratic variation [M, M ] can be defined
R
directly and then Xt = Mt2 [M, M ]t is itself a martingale. This along with Doob’s maxi-
mal inequality would show that square integrable martingales (and locally square integrable
martingales) are integrators. We would then go on to show that a local martingale (and
D
hence any semimartingale) is an integrator.

Next we show that every stochastic integrator is a semimartingale, thus proving a weak
version of the Dellacherie-Meyer-Mokobodzky- Bichteler Theorem. Subsequently, we prove
the full version of this result.
5.1 Notations and terminology

We begin with some definitions.
Definition 5.1. An r.c.l.l. adapted process M is said to be a square integrable martingale if
159
160 Chapter 5. Semimartingales
M is a martingale and
E[Mt2 ] < 1 8t < 1.
Exercise 5.2. Let M be a square integrable martingale. Show that
(i) sup0tT E[Mt2 ] < 1 for each T < 1.
(ii) E[sup0tT Mt2 ] < 1 for each T < 1.
Definition 5.3. An r.c.l.l. adapted process L is said to be a local martingale if there exist stop
n
times ⌧ n " 1 such that for each n, the process M n defined by M n = L[⌧ ] , i.e. Mtn = Lt^⌧ n
is a martingale.
Exercise 5.4. Let W be the Brownian motion and let U = exp(W12 ). Let
T
8
<W if t < 1
t
Lt =
:W + U (W W1 ) if t 1.
1 t
Let ⌧ n = 1 if U
that
F
n and ⌧ n = n if U  n. Let M n = L[⌧
n]
be the stopped process. Show
A
(i) For each n, ⌧ n is a stop time for the filtration (F⇧W ).
(ii) ⌧ n " 1.
R
(iii) M n is a martingale (w.r.t. the filtration (F⇧W )).
(iv) E[|Lt | ] = 1 for t > 1

D
This gives an example of a local martingale that is not a martingale.
For a local martingale L, one can choose the localizing sequence {⌧ n } such that ⌧ n  n
n
and then M n = L[⌧ ] is uniformly integrable.
Here is a simple condition under which a local martingale is a martingale.
Lemma 5.5. Let an r.c.l.l. process L be a local martingale such that
E[ sup |Ls | ] < 1 8t < 1. (5.1.1)

0st
Then L is a martingale.
5.1. Notations and terminology 161
n
Proof. Let ⌧ n " 1 such that for each n, the process M n defined by M n = L[⌧ ] is a
martingale. Then Mtn converges to Lt pointwise and (5.1.1) implies that sup0st |Ls |
serves as a dominating function. Thus, for each t, Mtn converges to Lt in L1 (P). Now the
required result follows using Theorem 2.21.
Definition 5.6. An r.c.l.l. adapted process N is said to be a locally square integrable mar-
tingale if there exist stop times ⌧ n " 1 such that for each n, the process M n defined by
n
M n = N [⌧ ] , i.e. Mtn = Nt^⌧ n is a square integrable martingale.
Exercise 5.7. Show that the process L constructed in Exercise 5.4 is a locally square inte-
grable martingale.
T
Definition 5.8. An r.c.l.l. adapted process X is said to be a semimartingale if X can be
written as X = M + A where M is an r.c.l.l. local martingale and A is an r.c.l.l. process whose
paths have finite variation on [0, T ] for all T < 1, i.e. Var[0,T ] (A) < 1 for all T < 1.
F
Let us denote by M the class of all r.c.l.l. martingales M with M0 = 0, M2 the class
of all r.c.l.l. square integrable martingales with M0 = 0. We will also denote by Mloc the
A
class of r.c.l.l. local martingales with M0 = 0 and M2loc the class of r.c.l.l. locally square
integrable martingales with M0 = 0. Thus, M 2 M2loc (Mloc ) if there exist stop times ⌧ n
n
increasing to infinity such that the stopped processes M [⌧ ] belong to M2 (respectively
R
belong to M).
Let Mc be the class of all continuous martingales M with M0 = 0, Mc,loc be the class of
all continuous local martingales M with M0 = 0 and M2c be the class of square integrable
D
continuous martingales M with M0 = 0.
Exercise 5.9. Show that Mc,loc ✓ M2loc .
Thus X is a semimartingale if we can write X = M + A where M 2 Mloc and A 2

V. We will first show that semimartingales are stochastic integrators. Recall that all
semimartingales and stochastic integrators are by definition r.c.l.l. processes. We begin
by showing that square integrable r.c.l.l. martingales are stochastic integrators. Usually
this step is done involving Doob-Meyer decomposition theorem. We bypass the same by a
study of quadratic variation as a functional on the path space
5.2 The Quadratic Variation Map

Let D([0, 1), R) denote the space of r.c.l.l. functions on [0, 1). Recall our convention that
for ↵ 2 D([0, 1), R), ↵(t ) denotes the left limit at t (for t > 0) and ↵(0 ) = 0 and
↵(t) = ↵(t) ↵(t ). Note that by definition, ↵(0) = ↵(0).
Exercise 5.10. Suppose fn 2 D([0, 1), R) are such that fn converges to a function f
uniformly on compact subsets of [0, 1), i.e. sup0tT |fn (t) f (t)| converges to zero for all
T < 1. Show that
(i) f 2 D([0, 1), R).
(ii) If sn 2 [0, s) converges to s 2 [0, 1) then fn (sn ) converges to f (s ).
T
(iii) fn (s ) converges to f (s ) for all s 2 [0, 1).
(iv) ( fn )(s) converges to ( f )(s) for all s 2 [0, 1).
We will now define quadratic variation (↵) of a function ↵ 2 D([0, 1), R).
F
For each n 1; let {tni (↵) : i 1} be defined inductively as follows : tn0 (↵) = 0 and
having defined tni (↵), let
A
tni+1 (↵) = inf{t > tni (↵) : |↵(t) ↵(tni (↵))| 2 n
or |↵(t ) ↵(tni (↵))| 2 n
}.
If limi tni (↵) = t⇤ < 1, then the function ↵ cannot have a left limit at t⇤ . Hence for each
↵ 2 D([0, 1), R) , tni (↵) " 1 as i " 1 for each n. Let
R
1
X
n (↵)(t) = (↵(tni+1 (↵) ^ t) ↵(tni (↵) ^ t))2 . (5.2.1)
i=0
Since tni (↵) increases to infinity, for each ↵ and n fixed, the infinite sum appearing above
D
is essentially a finite sum and hence n (↵) is itself an r.c.l.l. function. The space D =
D([0, 1), R) is equipped with the topology of uniform convergence on compact subsets
(abbreviated as ucc). Let D e denote the set of ↵ 2 D such that n (↵) converges in the ucc
topology and 8
<lim if ↵ 2 De
n n (↵)
(↵) = (5.2.2)
:0 e
if ↵ 62 D.
Here are some basic properties of the quadratic variation map .
e
Lemma 5.11. For ↵ 2 D
5.2. The Quadratic Variation Map 163
(i) (↵) is an increasing r.c.l.l. function.
(ii) (↵)(t) = ( ↵(t))2 for all t 2 (0, 1).

P
(iii) st ( ↵(s))2 < 1 for all t 2 (0, 1).
P
(iv) Let c (↵)(t) = (↵)(t) 0<st ( ↵(s))2 . Then c (↵) is a continuous function.
Proof. For (i), note that for s  t, if tnj  s < tnj+1 , then |(↵(s) ↵(tnj ))|  2 n, and
j 1
X
n (↵)(s) = (↵(tni+1 (↵)) ↵(tni (↵)))2 + (↵(s) ↵(tnj ))2
i=0
jX 1
n (↵)(t) = (↵(tni+1 (↵)) ↵(tni (↵)))2
i=0
T
1
X
+ (↵(tni+1 (↵) ^ t) ↵(tni (↵) ^ t))2
i=j
and hence
n (↵)(s)  F
n (↵)(t) +2 2n
Compare with (4.6.4). Thus (5.2.3) is valid for all n 1 and s  t and hence it follows that
. (5.2.3)
A
the limiting function (↵) is an increasing function. Uniform convergence of the r.c.l.l.
function n (↵) to (↵) implies that (↵) is an r.cl.l. function.
For (ii), it is easy to see that the set of points of discontinuity of n (↵) are contained
in the set of points of discontinuity of ↵ for each n. Uniform convergence of n (↵)(t) to
R
(↵)(t) for t 2 [0, T ] for every T < 1 implies that the same is true for (↵) i.e. for t > 0,
(↵)(t) 6= 0 implies that ↵(t) 6= 0.
On the other hand, let t > 0 be a discontinuity point for ↵. Let us note that by the
D
definition of tnj (↵),

n
|↵(u) ↵(v)|  2.2 8u, v 2 [tnj (↵), tnj+1 (↵)). (5.2.4)
Thus for n such that 2.2 n < (↵)(t), t must be equal to tnk (↵) for some k 1 since(5.2.4)
implies ↵(v) 2.2 n for any v 2 [j (tnj (↵), tnj+1 (↵)). Let sn = tnk 1 (↵) where k is such
that t = tnk (↵). Note that sn < t. Let s⇤ = lim inf n sn . We will prove that
lim ↵(sn ) = ↵(t ), lim n (↵)(sn ) = (↵)(t ). (5.2.5)

n n
If s⇤ = t, then sn < t for all n 1 implies sn ! t and (5.2.5) follows from uniform
convergence of n (↵) to (↵) on [0, t] (see Exercise 5.10).
If s⇤ < t, using (5.2.4) it follows that |↵(u) ↵(v)| = 0 for u, v 2 (s⇤ , t) and hence
the function ↵(u) is constant on the interval (s⇤ , t) and implying that sn ! s⇤ . Also,
↵(s⇤ ) = ↵(t ) and (↵)(s⇤ ) = (↵)(t ). So if ↵ is continuous at s⇤ , once again uniform
convergence of n (↵) to (↵) on [0, t] shows that (5.2.5) is valid in this case too.
Remains to consider the case s⇤ < t and ↵(s⇤ ) = > 0. In this case, for n such that
2.2 n < , sn = s⇤ and uniform convergence of n (↵) to (↵) on [0, t] shows that (5.2.5)
is true in this case as well.
We have (for large n)
n (↵)(t) = n (↵)(sn ) + (↵(sn ) ↵(t))2 (5.2.6)

and hence (5.2.5) yields
(↵)(t) = (↵)(t ) + [ ↵(t)]2
completing the proof of (ii).
T
(iii) follows from (i) and (ii) since for an increasing function that is non-negative at
zero, the sum of jumps up to t is at most equal to its value at t:
X
( ↵(s))2  (↵)(t).
0<st
The last part, (iv) follows from (ii), (iii).
F
A
Remark 5.12. is the quadratic variation map. It may depend upon the choice of the
partitions. If instead of 2 n , we had used any other sequence {"n }, it would yield another
mapping ˜ which will have similar properties. Our proof in the next section will show that if
P
R
n "n < 1, then for a square integrable local martingale (Mt ),
(M.(!)) = ˜ (M.(!)) a.s. P.
We note two more properties of the quadratic variation map . Recall that the total
D
variation Var(0,T ] (↵) of ↵ on the interval (0, T ] is defined by

m
X1
Var(0,T ] (↵) = sup{ |↵(sj+1 ) ↵(sj )| : 0  s1  s2  . . . sm = T, m 1}.
j=0
If Var(0,T ] (↵) < 1, ↵ is said to have finite variation on [0, T ] and then on [0, T ] it can be
written as di↵erence of two increasing functions.
Lemma 5.13. The quadratic variation map satisfies the following.

e and 0 < s < 1 fixed, let ↵s 2 D be defined by: ↵s (t) = ↵(t ^ s). Then
(i) For ↵ 2 D
e
↵s 2 D.
5.3. Quadratic Variation of a Square Integrable Martingale 165
e for all k, then

(ii) For ↵ 2 D and sk " 1, ↵k be defined via ↵k (t) = ↵(t ^ sk ). If ↵k 2 D
↵2D e and
(↵)(t ^ sk ) = (↵k )(t) , 8t < 1, 8k 1. (5.2.7)
(iii) Suppose ↵ is continuous, and Var(0,T ] (↵) < 1. Then (↵)(t) = 0, 8t 2 [0, T ].
Proof. (i) is immediate. For (ii), it can be checked from the definition that
k
n (↵)(t ^ sk ) = n (↵ )(t) , 8t. (5.2.8)
Since ↵k 2 D,e it follows that n (↵)(t) converges uniformly on [0, sk ] for every k and hence
using (5.2.8) we conclude that ↵ 2 D e and that (5.2.7) holds.
For (iii), note that ↵ being a continuous function,
|↵(tni+1 (↵) ^ t) ↵(tni (↵) ^ t)|  2 n
for all i, n and hence we have
T
1
X
n (↵)(t) = (↵(tni+1 (↵) ^ t) ↵(tni (↵) ^ t))2
i=0
1
X
2
2
n
n
⇥
i=0 F
|↵(tni+1 (↵) ^ t)
⇥ Var[0,T ] (↵).
↵(tni (↵) ^ t)|
A
This shows that (↵)(t) = 0 for t 2 [0, T ].
5.3 Quadratic Variation of a Square Integrable Martingale

R
The next lemma connects the quadratic variation map and r.c.l.l. martingales.
Lemma 5.14. Let (Nt , Ft ) be an r.c.l.l. martingale such that E(Nt2 ) < 1 for all t > 0.
D
Suppose there is a constant C < 1 such that with

⌧ = inf{t > 0 : |Nt | C or |Nt | C}
one has
Nt = Nt^⌧ .
Let
At (!) = [ (N.(!))](t).
Then (At ) is an (Ft ) adapted r.c.l.l. increasing process such that Xt := Nt2 At is also a
martingale.
Proof. Let n (↵) and tni (↵) be as in the previous section.

Ant (!) = n (N.(!))(t)
n
i (!) = tni (N.(!)) (5.3.1)
Ytn (!) = Nt2 (!) N02 (!) Ant (!)
It is easy to see that for each n, { n :i 1} are stop times (see theorem 2.44) and that
i
1
X
Ant = (N n
i+1 ^t
N n
i ^t
)2 .
i=0
Further, for each n, n
increases to 1 as i " 1.
i (!)
We will first prove that for each n, (Ytn ) is an (Ft )-martingale. Using the identity
b2 a2 (b a)2 = 2a(b a), we can write
X1
Ytn = Nt2 N02 (N i+1
n ^t N in ^t )2
T
i=0
1
X 1
X
2 2
= (N n
i+1 ^t
N n
i ^t
) (N n
i+1 ^t
N n
i ^t
)2
i=0 i=0
Let us define
=2
1
X
i=0
N n
i ^t
(N n
i+1 ^t
F N n
i ^t
)
A
Xtn,i = N n
i ^t
(N n
i+1 ^t
N n
i ^t
).
Then
1
X
Ytn = 2 Xtn,i . (5.3.2)
R
i=0
Noting that for s < ⌧ , |Ns |  C and for s ⌧ , Ns = N , it follows that
|N n
i+1 ^t
N n
i ^t
| > 0 implies that |N n
i ^t
|  C.
D
Thus, writing C (x) = max{min{x, C}, C} (x truncated at C), we have

Xtn,i = C (N n
i ^t
)(N n
i+1 ^t
N n
i ^t
) (5.3.3)
and hence, Xtn,i is a martingale. Using the fact that Xtn,i is Ft^ n
i+1
measurable and that
E(Xtn,i |Ft^ in ) = 0, it follows that for i 6= j,
E[Xtn,i Xtn,j ] = 0. (5.3.4)
Also, using (5.3.3) and the fact that N is a martingale we have
E(Xtn,i )2 C 2 E(N n
i+1 ^t
N . in ^t )2
(5.3.5)
=C 2 E(N 2i+1
n ^t N 2in ^t ).
Using (5.3.4) and (5.3.5), it follows that for s  r,

r
X
E( Xtn,i )2  C 2 E(N 2r+1
n ^t N 2sn ^t ). (5.3.6)
i=s
Since n increases to 1 as i tends to infinity, E(N 2sn ^t ) and E(N 2n ^t ) both tend to E[Nt2 ]
i r+1
P
as r, s tend to 1 and hence ri=1 Xtn,i converges in L2 (P). In view of (5.3.2), one has
r
X
2 Xtn,i ! Ytn in L2 (P) as r ! 1
i=1
and hence (Ytn ) is an (Ft ) - martingale for each n 1.

For n 1, define a process Nn by
Ntn = N n
i
if n
i t< n
i+1 .
T
Observe that by the choice of { n :i 1}, one has
i
|Nt Ntn |  2 n
for all t. (5.3.7)
For now let us fix n. For each ! 2 ⌦, let us define
H(!) = { n
i (!) : i F
1} [ { n+1
i (!)
It may be noted that for ! such that t 7! Nt (!) is continuous, each jn (!) is necessarily
: i 1} (5.3.8)
A
equal to in+1 (!) for some i, but this need not be the case when t 7! Nt (!) has jumps. Let
⇣0 (!) = 0 and for j 0, let
⇣j+1 (!) = inf{s > ⇣j (!) : s 2 H(!)}.

R
It can be verified that

n n+1
{⇣i (!) : i 1} = { i (!) : i 1} [ { i (!) : i 1}. (5.3.9)
D
To see that each ⇣i is a stop time, fix i 1, t < 1. Let

n n+1
Akj = {( k ^ t) 6= ( j ^ t)}.
n n+1
Since k, j are stop times, Akj 2 Ft for all k, j. It is not difficult to see that
{⇣i  t} = [ik=0 ({ n
i k  t} \ Bk )
where B0 = ⌦ and for 1  k  i,
Bk = [0<j1 <j2 <...<jk ( (\il=0k \km=1 Aljm ) \ { n+1

jk  t})
and hence ⇣i is a stop time.

Using (5.3.9) and using the fact that Ntn = Nt^ jn for jn  t < n
j+1 , one can write Y n
and Y n+1 as
X1
n n
Yt = 2Nt^⇣ j
(Nt^⇣j+1 Nt^⇣j ),
j=0
X1
Ytn+1 = n+1
2Nt^⇣j
(Nt^⇣j+1 Nt^⇣j ).
j=0
Hence
1
X
Ytn+1 Ytn = 2 Ztn,j (5.3.10)
j=0
where
Ztn,j = (Nt^⇣
n+1
j
n
Nt^⇣j
)(Nt^⇣j+1 Nt^⇣j ).
Also, using (5.3.7) one has
T
|Ntn+1 Ntn |  |Ntn+1 Nt | + |Nt Ntn |  2 (n+1)
+2 n
 2.2 n
(5.3.11)
and hence (using that (Ns ) is a martingale), one has
4 4
for i 6= j
2 2 F
E[(Ztn,j )2 ]  2n E[(Nt^⇣j+1 Nt^⇣j )2 ] = 2n E[(Nt^⇣j+1 )2 (Nt^⇣j )2 ].
Easy to see that E(Ztn,j |Ft^ jn ) = 0 and Ztn,j is Ft^ j+1n

(5.3.12)
measurable. It then follows that

A
E[Ztn,j Ztni ] = 0
and hence (using (5.3.12))
1
X
R
E(Ytn+1 Ytn )2 = 4E[( Ztn,j )2 ]

j=0
1
X
= 4E[ (Ztn,j )2 ]
D
j=0 (5.3.13)
X1
16
 E[(Nt^⇣j+1 )2 (Nt^⇣j )2 ]
22n
j=0
16
E[(Nt )2 ].
22n
Thus, recalling that Ytn+1 , Ytn are martingales, it follows that Ytn+1 Ytn is also a martingale
and thus invoking Doob’s maximal inequality, one has (using (5.3.13))
E[supsT |Ysn+1 Ysn |2 ]  4E(YTn+1 YTn )2
64 (5.3.14)
 2n E[NT2 ].
2
Thus, for each n 1,

8
k [supsT |Ysn+1 Ysn |] k2  kNT k2 . (5.3.15)
2n
It follows that
1
X
⇠= sup|Ysn+1 Ysn | < 1 a.s.
n=1sT
as k⇠k2 < 1 by (5.3.15). Hence (Ysn ) converges uniformly in s 2 [0, T ] for every T a.s.
to an r.c.l.l. process say (Ys ). As a result, (Ans ) also converges uniformly in s 2 [0, T ] for
every T < 1 a.s. to say (Ãs ) with Yt = Nt2 N02 Ãt . Further, (5.16) also implies that
for each s, convergence of Ysn to Ys is also in L2 and thus (Yt ) is a martingale. Since Ans
converges uniformly in s 2 [0, T ] for all T < 1 a.s., it follows that
e =1
P(! : N· (!) 2 D)
and Ãt = At . We have already proven that Yt = Nt2 N02 At is a martingale. This
T
completes the proof.
Exercise 5.15. Use completeness of the underlying -field to show that the set {! : N· (!) 2
e appearing above is measurable.
D}
F
We are now in a position to prove an analogue of the Doob-Meyer decomposition
theorem for the square of an r.c.l.l. locally square integrable martingale. We will use the
A
notation [N, N ] for the process A = (N.(!)) of the previous result and call it quadratic
variation of N . We will later show that square integrable martingales and locally square
integrable martingales are stochastic integrators. Then it would follow that the quadratic
R
variation defined for a stochastic integrator X via (4.6.2) agrees with the definition given
below for a square integrable martingale and a locally square integrable martingale.
Theorem 5.16. Let (Mt , Ft ) be an r.c.l.l. locally square integrable martingale i.e. there
D
exist stop times ⇣n increasing to 1 such that for each n, Mtn = Mt^⇣n is a martingale with
E[(Mt^⇣n )2 ] < 1 for all t, n. Let
[M, M ]t (!) = [ (M.(!))](t). (5.3.16)
Then
(i) ([M, M ]t ) is an (Ft ) adapted r.c.l.l. increasing process such that Xt = Mt2 [M, M ]t
is also a local martingale.
(ii)
P( [M, M ]t = ( Mt )2 , 8t > 0) = 1.
(iii) If (Bt ) is an r.c.l.l. adapted increasing process such that B0 = 0 and
P( Bt = ( Mt )2 , 8t > 0) = 1
and Vt = Mt2 Bt is a local martingale, then P(Bt = [M, M ]t , 8t) = 1.
(iv) If M is a martingale and E(Mt2 ) < 1 for all t, then E([M, M ]t ) < 1 for all t and
Xt = Mt2 [M, M ]t is a martingale.
(v) If E([M, M ]t ) < 1 for all t and M0 = 0, then E(Mt2 ) < 1 for all t, (Mt ) is a
martingale and Xt = Mt2 [M, M ]t is a martingale.
Proof. For k 1, let ⌧k be the stop time defined by
⌧k = inf{t > 0 : |Mt | k or |Mt | k} ^ ⇣k ^ k.
T
Then ⌧k increases to 1 and Mtk = Mt^⌧k is a martingale satisfying conditions of Lemma
5.14 with C = k and ⌧ = ⌧k . Hence Xtk = (Mtk )2 [M k , M k ]t is a martingale, where
[M k , M k ]t = (M·k (!))t . Also,
F
e = 1, 8k
P({! : M·k (!) 2 D})
Since Mtk = Mt^⌧k it follows from Lemma 5.13 that

1. (5.3.17)
A
e =1
P({! : M· (!) 2 D}) (5.3.18)
and
P({! : [M k , M k ]t (!) = [M, M ]t^⌧k (!) (!) 8t}) = 1.
R
It follows that Xt^⌧k = Xtk a.s. and since X k is a martingale for all k, it follows that
Xt is a local martingale. This completes the proof of part (i).
D
Part (ii) follows from Lemma 5.11.

For (iii), note that from part (ii) and the hypothesis on B it follows that
Ut = [M, M ]t Bt
is a continuous process. Recalling Xt = Mt2 [M, M ]t and Vt = Mt2 Bt are local

martingales, it follows that Ut = Vt Xt is also a local martingale with U0 = 0. By part (i)
above, Wt = Ut2 [U, U ]t is a local martingale. On the other hand, Ut being a di↵erence
of two increasing functions has bounded variation, Var(0,T ] (U ) < 1. Continuity of U and
part (iii) of Lemma 5.13 gives
[U, U ]t = 0 8t.
Hence Wt = Ut2 is a local martingale. Now if k are stop times increasing to 1 such that
Wt^ k is a martingale for k 1, then we have
2
E[Wt^ k ] = E[Ut^ k
] = E[U02 ] = 0.
and hence Ut^ 2 = 0 for each k. This yields Ut = 0 a.s. for every t. This completes the
k
proof of (iii).
For (iv), we have proven in (i) that Xt = Mt2 [M, M ]t is a local martingale. Let k
be stop times increasing to 1 such that Xtk = Xt^ k are martingales. Hence, E[Xtk ] = 0,
or
2
E([M, M ]t^ k ) = E(Mt^ k
) E(M02 ). (5.3.19)
Hence
2
E([M, M ]t^ k )  E(Mt^ k
)  E(Mt2 ). (5.3.20)
T
Now Fatou’s lemma (or Monotone convergence theorem) gives
E([M, M ]t )  E(Mt2 ) < 1. (5.3.21)
It also follows that Mt^2

k
F
converges to Mt2 in L1 (P) and [M, M ]t^ k converges to [M, M ]t
in L1 (P). Thus It follows that Xtk converges to Xt in L1 (P) and hence (Xt ) is a martingale.
For (v) let k be as in part (iv). Using M0 = 0, that [M, M ]t is increasing and (5.3.19)
A
we conclude
2
E[Mt^ k
] = E([M, M ]t^ k )
 E([M, M ]t )
R
Now using Fatou’s lemma, one gets
E[Mt2 ]  E([M, M ]t ) < 1.

D
Now we can invoke part (iv) to complete the proof.
Corollary 5.17. For an r.c.l.l. martingale M with M0 = 0 and E[MT ]2 < 1, one has
E[ [M, M ]T ]  E[ sup |Ms |2 ]  4E[ [M, M ]T ] (5.3.22)

0sT
Proof. Let Xt = Mt2 [M, M ]t . As noted above X is a martingale. Since X0 = 0, it

follows that E[XT ] = 0 and thus
E[ [M, M ]T ] = E[MT2 ]. (5.3.23)
The inequality (5.3.22) now follows from Doob’s maximal inequality, Theorem 2.24.
Corollary 5.18. For an r.c.l.l. locally square integrable martingale M , for any stop time
, one has
E[ sup |Ms |2 ]  4E[ [M, M ] ] (5.3.24)
0s
Proof. If ⌧n " 1, then using (5.3.22) for the square integrable martingale Mtn = Mt^⌧n we
get
E[ sup |Ms |2 ]  4E[ [M, M ] ^⌧n ]  4E[ [M, M ] ].
0s ^⌧n
Now the required result follows by Fatou’s lemma.
Theorem 5.19. Let M be a continuous local martingale with M0 = 0. If M 2 V then

Mt = 0 for all t.
T
Proof. Invoking (iii) in Lemma 5.13, we conclude that [M, M ]t = 0 for all t and thus the
conclusion follows from Corollary 5.18.
F
Remark 5.20. The pathwise formula for quadratic variation of a continuous local martingale
M was proven in Karandikar [33], but the proof required the theory of stochastic integration.
A proof involving only Doob’s inequality as presented above for the case of continuous local
A
martingales was the main theme of Karandikar [34]. The formula for r.c.l.l. case was given in
Karandikar [37] but the proof required again the theory of stochastic integration. The treatment
given above is adapted from Karandikar - Rao [41].
R
Exercise 5.21. If P is Weiner measure on C([0, 1), Rd ) and Q is a probability measure

absolutely continuous w.r.t. P such that the coordinate process is a local martingale (in the
D
sense that each component is a local martingale), then P = Q.

Hint: Use Levy’s characterization of Brownian motion.
For locally square integrable r.c.l.l. martingales M, N , we define cross-quadratic vari-

ation [M, N ] by the polarization identity as in the case of stochastic integrators (see
(4.6.6))
1
[M, N ]t = ([M + N, M + N ]t [M N, M N ]t ) (5.3.25)
4
and then it can be checked that [M, N ] is the only process B in V0 such that Mt Nt Bt
is a local martingale and P( ( B)t = ( M )t ( N )t 8t) = 1.
5.4. Square Integrable Martingales are Stochastic Integrators 173
5.4 Square Integrable Martingales are Stochastic Integra-

tors
The main aim of this section is to show that square integrable martingales are stochastic
integrators.
The treatment is essentially classical, as in Kunita-Watanabe [44], but with an excep-
tion. The role of hM, M i - the predictable quadratic variation in the Kunita-Watanabe
treatment is here played by the quadratic variation [M, M ].
Recall that M2 denotes the class of r.c.l.l. martingales M such that E[Mt2 ] < 1 for all
t < 1 with M0 = 0.
Lemma 5.22. Let M, N 2 M2 and f, g 2 S. Let X = JM (f ) and Y = JN (g). Let

Rt
Z t = Xt Yt 0 fs gs d[M, N ]s . Then X, Y, Z are martingales.
T
Proof. The proof is almost exactly the same as proof of Lemma 3.8 and it uses Mt Nt
[M, N ]t is a martingale along with Theorem 2.57, Corollary 2.58 and Theorem 2.59.
Rt
Rt 2
0 fs d[M, M ]s are martingales and
Z t
2
F
Corollary 5.23. Let M 2 M2 and f 2 S. Then Yt = 0 f dM and Zt = (Yt )2
Z T
fs2 d[M, M ]s ].
A
E[ sup | f dM | ]  4E[ (5.4.1)
0tT 0 0
Proof. Lemma 5.22 gives Y, Z are martingales. The estimate (5.4.1) now follows from
Doob’s inequality.
R
Theorem 5.24. Let M 2 M2 . Then M is a stochastic integrator. Further, for f 2

R Rt 2
e P), the processes Yt = t f dM and Zt = Y 2
B(⌦,
Rt 2 0 t 0 fs d[M, M ]s are martingales,
[Y, Y ]t = 0 fs d[M, M ]s and
D
Z t Z T
2
E[ sup | f dM | ]  4E[ fs2 d[M, M ]s ], 8T < 1. (5.4.2)
0tT 0 0
Proof. Fix T < 1. Suffices to prove the result for the case when Mt = Mt^T . The rest
follows by localization. See Theorem 4.45. Recall that ⌦ e = [0, 1) ⇥ ⌦ and P is the
e Let µ be the measure on (⌦,
predictable -field on ⌦. e P) defined for A 2 P
Z Z T
µ(A) = [ 1A (!, s)d[M, M ]s (!)]dP(!). (5.4.3)
0
Note that
e = E[ [M, M ]T ] = E[|MT |2 ] < 1
µ(⌦)
e P) the norm on L2 (⌦,

and for f 2 B(⌦, e P, µ) is given by
s
Z T
kf k2,µ = E[ fs2 d[M, M ]s ]. (5.4.4)
0
e P) ✓ L2 (⌦,
Clearly, B(⌦, e P, µ). Since (S) = P, it follows from Theorem 2.65 that S is
e P, µ). Thus, given f 2 B(⌦,
dense in L2 (⌦, e P), we can get f n 2 S such that
kf f n k2,µ  2 n 1
. (5.4.5)
Rt
Letting Ytn = 0 f n dM for t  T and Ytn = YTn for t > T one has for m, n k
E[ sup |Ytn Ytm |2 ]  4kf m f n k22,µ  4.4 n

.
0tT
It then follows that (as in the proof of Lemma 3.10) Ytn converges uniformly in t to Yt
(a.s.), where Y is an r.c.l.l. adapted process with Yt = Yt^T . For any g 2 S, using the
T
estimate (5.4.1) for f n g, we get
Z t
E[ sup |Ytn gdM |2 ]  4kf n gk22,µ
0tT 0
E[ sup |Yt
F
and taking limit as n tends to infinity in the inequality above we get
Z t
gdM |2 ]  4kf gk22,µ . (5.4.6)
A
0tT 0
Rt
Let us denote Y as JM (f ). The equation (5.4.6) implies that for f 2 S, JM (f ) = 0 f dM .
Also, (5.4.6) implies that the process Y does not depend upon the choice of the particular
e P), a sequence hm 2 S approximating
sequence {f n } in (5.4.5). Further, taking h 2 B(⌦,
R
h, using (5.4.6) for hm and taking limit as m ! 1
E[ sup |(JM (f ))t (JM (h))t |2 ]  4kf hk22,µ . (5.4.7)

0tT
D
bp
The estimate (5.4.7) implies that if fn ! f , then JM (f n ) converges to JM (f ) in ucp
topology and thus M is a stochastic integrator.
The estimate (5.4.2) follows from (5.4.7) by taking h = 0.
Rt RT
Remains to show that Yt = 0 f dM and Zt = Yt2 0 fs2 d[M, M ]s are martingales. We
RT n 2
have seen in Corollary 5.23 that Y n and Ztn = (Ytn )2 0 (f )s d[M, M ]s are martingales.
Here Yt converges to Yt in L (P) (and hence in L (P)) and so Y is a martingale. Further,
n 2 1
(Ytn )2 ! (Yt )2 in L1 (P) and moreover kf n f k2,µ ! 0 implies

Z t
E[ |(fsn )2 fs2 |d[M, M ]s ] ! 0
0
5.4. Square Integrable Martingales are Stochastic Integrators 175
and thus Z t
E| ((fsn )2 fs2 )d[M, M ]s | ! 0.
0
So Ztn converges to Zt in L1 (P) and thus Z is also a martingale. Since

Z
( fs2 d[M, M ] ) = f 2 ( M )2 = ( Y )2
Rt
using part (iii) of Theorem 5.16, it now follows that [Y, Y ]t = 0 fs2 d[M, M ]s .
R
Let us now introduce a class of integrands f such that f dM is a locally square
integrable martingale.
Definition 5.25. For M 2 M2loc let L2m (M ) denote the class of predictable processes f such
T
that there exist stop times k " 1 with
Z k
E[ fs2 d[M, M ]s ] < 1 for k 1. (5.4.8)
0
We then have the following.

F
Theorem 5.26. Let M 2 M2loc i.e. M be a locally square integrable r.c.l.l. martingale with
A
M0 = 0. Then M is a stochastic integrator,
L2m (M ) ✓ L(M ) (5.4.9)

R t
and for f 2 L2m (M ), the process Yt = 0 f dM is a locally square integrable martingale and
R
R t 2 Rt 2
Ut = Yt2 0 f s d[M, M ] s is a local martingales, [Y, Y ] t = 0 fs d[M, M ]s . Further, for
any stop time , Z Zt
E[ sup | f dM |2 ]  4E[ fs2 d[M, M ]s ]. (5.4.10)
D
0t 0 0
Proof. Let {⇣k } be stop times such that M k = M [⇣k ] 2 M2 . Then M k is a stochastic
integrator by Theorem 5.24 and thus so is M by Theorem 4.45.
Now given f 2 L2m (M ), let k " 1 be stop times such that (5.4.8) is true and let
⌧k = k ^ ⇣k ^ k.
Let gn be bounded predictable processes, with |gn |  |f | such that gn converges to 0
R
pointwise. Let Z n = gn dM . To prove f 2 L(M ), we need to show that ducp (Z n , 0)
converges to 0. In view of Lemma 2.72, suffices to show that for each k 1,
ucp
Y n,k = (Z n )[⌧k ] !0 as n ! 1. (5.4.11)
R
Note that Y n,k = gn 1[0,⌧k ] dM k . Also, Y n,k is a square integrable martingale since gn is
bounded and M k is a square integrable martingale. Moreover,
Z T
n,k n,k
E([Y , Y ]T ) = E( (gn )2 1[0,⌧k ] d[M k , M k ])
0
Z ⇣k
 E( (gn )2 d[M, M ].
0
Sine gn converge pointwise to 0 and |gn |  |f | and f satisfies (5.4.8), it follows that for
each k fixed, E([Y n,k , Y n,k ]T ) ! 0 as n ! 1. Invoking (5.3.22), we thus conclude
lim E[ sup |Ytn,k |2 ] = 0.

n!1 0tT
Thus, (5.4.11) holds completing the proof that f 2 L(M ).

The proof that Y is a square integrable martingale and that U is a martingale are
T
similar to the proof of part (iv) in Theorem 5.16. The estimate (5.4.10) follows invoking
(5.3.24) as Y 2 M2loc .
Remark 5.27. Now that we have shown that locally square integrable r.c.l.l. martingales M
F
are stochastic integrators, the quadratic variation of M defined via the mapping is consistent
with the definition of [M, M ] given in Theorem 4.59. As a consequence various identities and
inequalities that were proven for the quadratic variation of a stochastic integrator in Section
A
4.6 also apply to quadratic variation of locally square integrable martingales. Thus from now
on we will drop the superfix in [M, M ] .
R
Remark 5.28. When M is a continuous martinagle with M0 = 0, it follows that M is locally

square integrable (since it is locally bounded). Further, [M, M ]t is continuous and hence for
any predictable f such that
Z t
D
Dt = fs2 d[M, M ]s < 1 a.s. , (5.4.12)

0
D itself is continuous. Thus D is locally bounded and hence f 2 L2m (M ). It is easy to see
that if f 2 L2m (M ) then f satisfies (5.4.12).
The estimate (5.4.10) has the following implication.
Theorem 5.29. Suppose M n , M 2 M2 are such that
E[ [M n M, M n M ]T ] ! 0 8T < 1. (5.4.13)
Then M n converges to M in Emery topology.

5.5. Semimartingales are Stochastic Integrators 177
Proof. Given predictable f bounded by 1, using (5.4.10) one gets

Z t Z t Z T
n 1
P( sup | f dM f dM | > )  2 E[ |fs |2 d[M n M, M n M ]s ]
0tT 0 0 0
1
 2
E[[M n M, M n M ]T ].
This proves M n converges to M in Emery topology in view of the observation (4.9.5).
5.5 Semimartingales are Stochastic Integrators

In the previous section, we have shown that locally square integrable martingales are
stochastic integrators. In this section, we propose to show that all martingales are inte-
grators and hence by localization it would follow that local martingales are integrators as
well.
T
Earlier we have shown that processes whose paths have finite variation on [0, T ] for every
T are stochastic integrators. It would then follow that all semimartingales are stochastic
integrators. Here is the continuous analogue of the Burkholder’s inequality, Theorem 1.43.
F
Lemma 5.30. Let Z be a r.c.l.l. martingale with Z0 = 0 and f 2 S1 , namely a simple
predictable process bounded by 1. Then for all > 0, T < 1 we have
Z t
20
A
P( sup | f dZ| > )  E[|ZT | ]. (5.5.1)
0tT 0
Proof. Let f 2 S1 be given by

m
X1
R
f (s) = a0 1{0} (s) + aj+1 1(sj ,sj+1 ] (s) (5.5.2)

j=0
where 0 = s0 < s1 < s2 < . . . < sm < 1, aj is Fsj 1 measurable random variable, |aj |  1,
1  j  m and a0 is F0 measurable and |a0 |  1. Without loss of generality, we assume
D
that sm 1 < T = sm . Then

Z t m
X
f dZ = ak (Zsk ^t Zsk 1 ^t ). (5.5.3)
0 k=1
Let us define a discrete process Mk = Zsk and discrete filtration Gk = Fsk for 0  k  m.
Then M is a martingale with respect to the filtration {Gk : 0  k  m}. Let us also define
Uk = ak , 1  k  m and U0 = 0. Then U is predictable (with respect to {Gk : 0  k  m})
and is bounded by 1 and hence using Theorem 1.43 we conclude that for ↵ > 0,
X n
9 9
P( max | Uk (Mk Mk 1 )| ↵)  E[|Mm | ] = E[|ZT | ]. (5.5.4)
1nm ↵ ↵
k=1
Rt R sk 1
Note that for sk 1  t  sk , defining Vtk = 0 f dZ 0 f dZ, we have Vtk = ak (Zt
Zsk 1 ) and hence
sup |Vtk |  2 sup |Zt | (5.5.5)
sk 1 tsk 0tT
R sk P
Also, note that 0 f dZ = kj=1 Uj (Mj Mj 1 ) and hence
Z t Z sk
sup | f dZ|  max | f dZ| + max sup |Vtk |
0tT 0 1km 0 1km sk 1 tsk
k (5.5.6)
X
 max | Uj (Mj Mj 1 )| + 2 sup |Zt |.
1km 0tT
j=1
Thus using (5.5.4) and (5.5.6) along with Theorem 2.24 we get
Z t k
X 3
P( sup | f dZ| > ) P( max | Uj (Mj Mj 1 )| > )
T
0tT 0 1km 4
j=1
1
+ P(2 sup |Zt | > )
0tT 4 (5.5.7)

36
3
20
F 8
E[|ZT | ] + E[|ZT | ]
= E[|ZT | ].
A
Lemma 5.31. Let M be a square integrable r.c.l.l. martingale with M0 = 0 and let g be a
bounded predictable process, |g|  C. Then
R
Z t
20
P( sup | gdM | > )  C E[|MT | ]. (5.5.8)
0tT 0
D
Proof. When g is simple predictable process, the inequality (5.5.8) follows from Lemma
5.30. Since M is a stochastic integrator, the class of predictable processes g bounded by C
for which (5.5.8) is true is bp- closed and hence it includes all such processes.
Theorem 5.32. Let M be a uniformly integrable r.c.l.l. martingale with M0 = 0. Then

M is a stochastic integrator and (5.5.8) continues to be true for all bounded predictable
process g.
Proof. In view of Theorem 4.30, in order to show that M is a stochastic integrator for the
filtration (F⇧ ), suffices to show that it is a stochastic integrator w.r.t. (F⇧+ ). Recall that M
being r.c.l.l., remains a uniformly integrable martingale w.r.t. (F⇧+ ).
5.5. Semimartingales are Stochastic Integrators 179
Since M is a uniformly integrable martingale, by Theorem 2.23, ⇠ = limt!1 Mt exists

a.e and in L1 (P) and further Mt = E[⇠ | Ft+ ]. For k 1, let M k be the r.c.l.l. (F⇧+ )-
martingale given by
Mtk = E[⇠ 1{|⇠|k} | Ft+ ] E[⇠ 1{|⇠|k} | F0+ ].
Note that for any T < 1, and k, j n
E[|MTk MTj | ]  2E[|⇠|1{|⇠|>n} ] (5.5.9)
and
E[|MTk MT | ]  2E[|⇠|1{|⇠|>n} ]. (5.5.10)
Doob’s maximal inequality - Theorem 2.24 now implies that M k converges to M in ducp
metric.
Let an = E[|⇠|1{|⇠|>n} ]. Since ⇠ is integrable, it follows that an ! 0 as n ! 1.
T
Since M k is a bounded (F⇧+ )-martingale, it is a square integrable (F⇧+ )-martingale and
hence a (F⇧+ )-stochastic integrator. We will first prove that M k is Cauchy in dem metric.
Note that for any f 2 S1 , using (5.5.8) we have for k, j n,
Z t Z t
P( sup | f dM k
0tT 0 0
F 20
f dM j | > )  E[|MTk MTj | ] = an
40
and hence, using (4.9.6) it follows that {M k : k 1} is Cauchy in dem metric.

A
Since the class of stochastic integrators is complete in dem metric as seen in Theorem
4.98, and M k converges to M in ducp , it would follow that indeed M is also a (F⇧+ )-
stochastic integrator and M k converges to M in dem .
R
Since (5.5.8) holds for M k and for any bounded predictable g, gdM k converges to
R
R
gdM in ducp , it follows that (5.5.8) continues to be true for uniformly integrable martin-
gales M .
D
The proof given above essentially also contains the proof of the following observations.
Theorem 5.33. Let N, N k , M k for k 1 be uniformly integrable r.c.l.l. martingales.
(i) If for all T < 1

E[ |NTk NT | ] ! 0 as k ! 1,
then N k converges to N in the Emery topology.
(ii) If for all T < 1

E[ |MTk MTn | ] ! 0 as k, n ! 1,
then M k is Cauchy in the dem -metric for the Emery topology.
Here is the final result of this section.
Theorem 5.34. Let an r.c.l.l. process X be a semimartingale, i.e. X can be decomposed

as X = M + A where M is an r.c.l.l. local martingale and A is an r.c.l.l. process with finite
variation paths. Then X is a stochastic integrator.
Proof. We have shown that uniformly integrable r.c.l.l. martingales are stochastic integra-
tors and hence by localization, all r.c.l.l. local martingales are integrators. Thus M is an in-
tegrator. Of course, r.c.l.l. processes A with finite variation paths, i.e. Var[0,T ] (A· (!)) < 1
for all T < 1 for all ! 2 ⌦, are integrators and thus X = M + A is a stochastic integra-
tor.
5.6 Stochastic Integrators are Semimartingales
T
The aim of this section is to prove the converse to Theorem 5.34. These two results taken
constitute one version of The Bichteler-Dellacherie-Meyer-Mokobodzky Theorem.
Let Z be a stochastic integrator. Let
Bt = Z0 +
X
0<st
F
( Z)s 1{|( Z)s |>1} . (5.6.1)
A
Since paths of Z are r.c.l.l., for every !, there only finitely many jumps of Z of size greater
than 1 in [0, t] and thus B is a well defined r.c.l.l. adapted process whose paths are of finite
variation and hence B itself is a stochastic integrator. Thus Y = Z B is a stochastic
R
integrator and now jumps of Y are of magnitude at most 1. Now defining stop times ⌧n
for n 1 via
⌧ n = inf{t > 0 : |Yt | n or |Yt | n} (5.6.2)
D
n
and Y n = Y [⌧ ] (i.e. Ytn = Yt^⌧ n ), it follows that for each n, Y n is a stochastic integrator
by Lemma 4.43. Further Y n is bounded by n + 1, since its jumps are bounded by 1.
We will show that bounded stochastic integrators X can be decomposed as X = M + A
where M is a r.c.l.l. square integrable martingale and A is an r.c.l.l. process with finite
variation paths. We will also show that this decomposition is unique under a certain condi-
tion on A. This would help in piecing together {M n }, {An } obtained in the decomposition
Y n = M n + An of Y n to get a decomposition of Y into an r.c.l.l. locally square integrable
martingale and an r.c.l.l. process with finite variation paths.
The proof of these steps is split into several lemmas.
5.6. Stochastic Integrators are Semimartingales 181
Lemma 5.35. Let M n 2 M2 be a sequence of r.c.l.l. square integrable martingales such

that M0n = 0. Suppose 9 T < 1 such that Mtn = Mt^T
n and
E[[M n M k, M n M k ]T ] ! 0 as min(k, n) ! 1. (5.6.3)
Then there exists an r.c.l.l. square integrable martingale M 2 M2 such that
lim E[[M n M, M n M ]T ] = 0, (5.6.4)

n!1
dem (M n , M ) ! 0 and
lim E[ sup |Mtn Mt |2 ] = 0. (5.6.5)
n!1 0tT
Proof. The relation (5.3.23) and the hypothesis (5.6.3) implies that
E[ sup |Msn Msk |2 ] ! 0 as min(k, n) ! 1. (5.6.6)

0tT
T
Hence the sequence of processes {M n } is Cauchy in ucp metric and thus in view of Theorem
2.68 converges to an r.c.l.l. adapted process M and (5.6.6) is satisfied. Further, (5.6.6) also
implies that Msn converges to Ms in L2 (P) for each s and hence using Theorem 2.21 it
F
follows that M is a martingale, indeed a square integrable martingale. As a consequence
(MTn MT ) ! 0 in L2 (P) and using (5.3.23) it follows that (5.6.4) is true. The convergence
of M n to M in Emery topology follows from Theorem 5.29.
A
If M n in the Lemma above are continuous, it follows that M is also continuous. This
gives us the following.
Corollary 5.36. Let M n 2 M2 be a sequence of continuous square integrable martingales

R
such that M0n = 0. Suppose 9 T < 1 such that Mtn = Mt^T

n and
E[[M n M k, M n M k ]T ] ! 0 as min(k, n) ! 1. (5.6.7)

D
Then there exists a continuous square integrable martingale M 2 M2 such that
lim E[[M n M, M n M ]T ] = 0 (5.6.8)

n!1
dem (M n , M ) ! 0 and
lim E[ sup |Mtn Mt |2 ] = 0. (5.6.9)
n!1 0tT
Theorem 5.37. Let X be a stochastic integrator such that
(i) Xt = Xt^T for all t,
(ii) E[[X, X]T ] < 1.

Then X admits a decomposition X = M + A where M is an r.c.l.l. square integrable

martingale and A is a stochastic integrator satisfying
E[[N, A]T ] = 0 (5.6.10)
for all r.c.l.l. square integrable martingales N .
Proof. The proof is very similar to the proof of existence of the projection operator on a
Hilbert space onto a closed subspace of the Hilbert space. Let
↵ = inf{E[[X M, X M ]T ] : M 2 M2 }.
Since E[[X, X]T ] < 1, it follows that ↵ < 1. For k 1, let M̃ k 2 M2 be such that
1
E[[X M̃ k , X M̃ k ]T ]  ↵ + .
k
T
Define Mtk = M̃t^T
k , t 0, k 1. Then
1
E[[X M k, X M k ]T ] = E[[X M̃ k , X M̃ k ]T ]  ↵ + .
k
we get
[Y k Y n, Y k
F
Applying the parallelogram identity (4.6.13) to Y k = 12 (X
Y n ]T = 2[Y k , Y k ]T + 2[Y n , Y n ]T
M k ), Y n = 21 (X
[Y k + Y n , Y k + Y n ]T
M n)
A
(5.6.11)
1
Note that Y k + Y n = X 2 (M
n + M k ) and since 12 (M n + M k ) 2 M2 , we have
E[[Y k + Y n , Y k + Y n ]T ] ↵
R
and hence
1 1 1 1
E[[Y k Y n, Y k Y n ]T ]  2( (↵ + )) + 2( (↵ + )) ↵ (5.6.12)
4 k 4 n
D
Since Y k Y n = 12 (M n M k ), (5.6.11)-(5.6.12) yields

1 1 1 1
E[[M n M k, M n M k ]T ]  ( + )
4 2 k n
Thus by Lemma 5.35, it follows that there exists M 2 M2 such that
lim E[[M n M, M n M ]T ] = 0. (5.6.13)

n!1
We now show that ↵ is attained for this M . Let us define Y = 12 (X M ). Then we have
Y n Y = 12 (M M n ) and hence (5.6.13) yields
E[[Y n Y, Y n Y ]T ] ! 0. (5.6.14)
Using (4.6.14) we have

|E[[Y n , Y n ]T ] E[[Y, Y ]T ]|
 E[|[Y n , Y n ]T [Y, Y ]T | ]
p (5.6.15)
 E[ 2([Y n Y, Y n Y ]T ).([Y n , Y n ]T + [Y, Y ]T )]
p
 2(E[[Y n Y, Y n Y ]T ])(E[[Y n , Y n ]T + [Y, Y ]T ])
Since E[[Y n , Y n ]T ]  14 (↵ + n1 ) and E[[Y, Y ]T ]  2(E[[X, X]T + [M, M ]T ]) < 1, (5.6.14) and
(5.6.15) together yield E[[Y n , Y n ]T ] ! E[[Y, Y ]T ] as n ! 1 and hence E[[Y, Y ]T ]  14 ↵.
On the other hand, since Y = 12 (X M ) where M 2 M2 , we have E[[Y, Y ]T ] 1
4 ↵ and
1 1
hence E[[Y, Y ]T ] = 4 ↵. Recalling Y = 2 (X M ) we conclude E[[X M, X M ]T ] = ↵.
By definition of ↵ we have, for any N 2 M2 , for all u 2 R
E[[X M uN, X M uN ]T ] ↵ = E[[X M, X M ]T ]
T
since M + uN 2 M2 . We thus have
u2 E[[N, N ]T ] 2uE[[N, X M ]T ] 0 for all u 2 R. (5.6.16)
F
This implies E[[N, X M ]T ] = 0. Now the result follows by setting A = X M . A is a
stochastic integrator because X is so by hypothesis and M has been proven to be so.
Recall that M2c denotes the class of continuous square integrable martingales. A small
A
modification of the proof above yields the following.

R
(ii) E[[X, X]T ] < 1.

D
Then X admits a decomposition X = N + Y where N is a continuous square integrable

martingale and Y is a stochastic integrator satisfying
E[[Y, U ]T ] = 0 8U 2 M2c . (5.6.17)
Proof. This time we define

↵0 = inf{E[[X M, X M ]T ] : M 2 M2c }
and proceed as in the proof of Theorem 5.37.
The next lemma shows that (5.6.10) implies an apparently stronger conclusion- that
[N, A] is a martingale for N 2 M2 .
Lemma 5.39. Let A be a stochastic integrator such that
(i) At = At^T , 8t < 1,
(ii) E[[A, A]T ] < 1,
(iii) E[[N, A]T ] = 0 for all N 2 M2 .
Then [N, A] is a martingale for all N 2 M2 .
Proof. Fix N 2 M2 . For any stop time , N [ ] is also a square integrable martingale and
[ ]
(4.6.9) gives [N [ ] , A]T = [N, A]T = [N, A]T ^ and thus we conclude E[[N, A]T ^ ] = 0.
Theorem 2.53 now implies that [N, A] is a martingale.
T
Remark 5.40. If U is a continuous square integrable martingale and is a stop time, U [ ]
is also a continuous square integrable martingale. Hence, arguments as in the proof of the
previous result yields that if a stochastic integrator Y satisfies (5.6.17), then
F
[Y, U ] is a martingale 8U 2 M2c .
The next result would tell us that essentially, the integrator A obtained above has finite
A
variation paths (under some additional conditions).
Lemma 5.41. Let A be a stochastic integrator such that

R
(i) At = At^T , 8t < 1,
(ii) E[B] < 1 where B = suptT |At | + [A, A]T ,

D
(iii) [N, A] is a martingale for all N 2 M2 (F⇧+ ).
Then A is a process with finite variation paths: Var[0,T ] (A) < 1 a.s.
˜ = {0 = s0 < s1 < . . . < sm = T } of [0, T ] let us denote

Proof. For a partition ⇡
m
X
V ⇡˜ = |Asj Asj 1 |.
j=1
We will show that for all " > 0, 9K < 1 such that
sup P(V ⇡ K) < " (5.6.18)

⇡
where the supremum above is taken over all partitions of [0, T ]. Taking a sequence ⇡ n of
successively finer partitions such that (⇡ n ) ! 0 (for example, ⇡ n = {kT 2 n : 0  k 
n
2n }), it follows that V ⇡ " Var[0,T ] (A) and thus (5.6.18) would imply
P(Var[0,T ] (A) K) < "
and hence that P(Var[0,T ] (A) < 1) = 1. This would complete the proof.
Fix " > 0. Since A is a stochastic integrator for the filtration (F⇧ ), it is also a stochastic
integrator for the filtration (F⇧+ ) in view of Theorem 4.3. Thus we can get (see Remark
4.23) J1 < 1 such that
Z T
"
sup P(| f dA| J1 )  . (5.6.19)
f 2S1 (F + ) 0 6
⇧
Since E[B] < 1, we can get J2 < 1 such that

"
J2 )  . P(B (5.6.20)
T
6
Let J = max{J1 , J2 , E[B]} and n be such that 24 n < ". Let K = (n + 1)J. We will show
that (5.6.18) holds for this choice of K. Note that the choice has been made independent
of a partition.
Now fix a partition ⇡ = {0 = t0 < t1 < . . . < tm = T }. Recall that for x 2 R,F
sgn(x) = 1 for x 0 and sgn(x) = 1 for x < 0, so that |x| = sgn(x)x. For 1  j  m, let
A
us consider the (F⇧+ )-martingale
Z̃tj = E[sgn(Atj Atj 1 ) | Ft+ ].
Since the filtration (F⇧+ ) is right continuous, the martingale Z̃tj admits an r.c.l.l. version
R
Ztj . Then Ztjj = sgn(Atj Atj 1 ) and hence

Ztjj (Atj Atj 1 ) = |(Atj Atj 1 )|.
Rt
Writing Ctj = 1(tj dAs = (At^tj At^tj 1 ), we get by integration by parts formula
D
0 1 ,tj ]
(4.6.7)
|(Atj Atj 1 )| = Ztjj Ctjj
Z tj Z tj
j
= j
Zs dCs + Csj dZsj + [Z j , C j ]tj
0 0
Z tj Z tj
j
= Zs dAs + Csj dZsj + [Z j , A]tj [Z j , A]tj 1
tj 1 tj 1
and for tj 1  t  tj
Z t Z t
Ztj Ctj = Zsj dAs + Csj dZsj + [Z j , A]t [Z j , A]tj 1 .
tj 1 tj 1
Let us define
m
X
Zt = Ztj 1(tj 1 ,tj ]
(t),
j=1
m
X
Ct = Ctj 1(tj 1 ,tj ]
(t),
j=1
m
X j j
Mt = (Zt^t j
Zt^t j 1
).
j=1
It follows that |Cs |  2B, |Zs |  1, M is a bounded (F⇧+ )- martingale and

Xm
[M, A]t = ([Z j , A]t^tj [Z j , A]t^tj 1 ).
j=1
Thus, defining Z Z
T
t t
Yt = Zs dAs + Cs dMs + [M, A]t
0 0
we get, for tk 1  t < tk , 1  k  m
k 1
and thus Yt
Yt =
2B. Also note that

X
j=1
|(Atj F Atj 1 )| + Ztk Ctk
A
m
X
YT = |(Atj Atj 1 )| = V ⇡ .
j=1
Rt
Let Ut = 0 Cs dMs + [M, A]t , it follows that U is a (F⇧+ )-local martingale since by
R
Rt
assumption on A, [M, A] is itself a (F⇧+ )-martingale and thus 0 Cs dMs is a (F⇧+ )local
martingale by Theorem 5.26. Further
Z t
D
Yt = Zs dAs + Ut .
0
Now defining
⌧ = inf{t 0 : Ut < 3J} ^ T
it follows that ⌧ is a stop time (see Lemma 2.46) and
{⌧ < T } ✓ {U⌧  3J}.
Since Y⌧ 2B, we note that
({⌧ < T } \ {B < J}) ✓ ({U⌧  3J} \ {Y⌧ 2J}
Z ⌧
✓{ Zs dAs J}.
0
Hence using (5.6.19) and (5.6.20) we conclude

Z ⌧
"
P(⌧ < T )  P( Zs dAs J) + P(B J)  . (5.6.21)
0 3
Now ( U )t = Ct ( M )t + ( M )t ( A)t . Since M is bounded by 1, ( M )t  2. Also,
|Ct |  2B and |( A)t |  2B. Thus |( U )t |  8B. Let n be (F⇧+ )-stop times such that
U [ n ] is a (F⇧+ )-martingale. By definition of ⌧ , it follows that Ut^ n ^⌧ (3J + 8B). Since
[ ] +
U n is a (F⇧ )-martingale, we have E[UT ^ n ^⌧ ] = 0. Recall that B is integrable and hence
using Fatou’s lemma we conclude
E[UT ^⌧ ]  0. (5.6.22)
Since UT ^⌧ (3J + 8B) and J E[B], it follows that E[(UT ^⌧ ) ]  E[(3J + 8B)]. Thus
using (5.6.22) we conclude
E[(UT ^⌧ )+ ]  11J. (5.6.23)
RT
T
Since V ⇡ = YT = 0 Zs dAs + UT and recalling that K = (n + 1)J
Z T
⇡
P(V K)  P( Zs dAs J) + P(UT nJ)
0
"
6
" "
 + +
6 3 nJ
F
 + P(⌧ < T ) + P(U⌧ nJ)
1
E[(U⌧ )+ ]
A
" 11J
 +
2 nJ
" "
< + ="
2 2
24
R
since by our choice n < ". This proves (5.6.18) and completes the proof as noted earlier.
We now put together the results obtained earlier in this chapter to get the following
D
key step in the main theorem of the section. We have to avoid assuming right continuity
of the filtration in the main theorem. However, it required in the previous result and we
avoid the same by an interesting argument. Here is a lemma that is useful here and in
later chapter.
Lemma 5.42. Let (⌦, F, P) be a complete probability space and let H ✓ G be sub- fields
of F such that H contains all the P null sets in F. Let Z be an integrable G measurable
random variable such that for all G measurable bounded random variables U one has
E[ZU ] = E[ZE[U | H]]. (5.6.24)
Then Z is H measurable.
Proof. Noting that
E[ZE[U | H]] = E[E[Z | H]E[U | H]] = E[E[Z | H]U ]
using (5.6.24) it follows that for all G measurable bounded random variables U
E[(Z E[Z | H])U ] = 0. (5.6.25)
Taking U = sgn(Z E[Z | H]) (here sgn(x) = 1 for x 0 and sgn(x) = 1 for x < 0), we
conclude from (5.6.25) that
E[ |(Z E[Z | H])| ] = 0.
Since H is assumed to contain all P null sets in F, it follows that Z is H measurable.
T
(ii) E[supsT |Xs | ] < 1,
(iii) E[[X, X]T ] < 1.
Then X admits a decomposition

F
A
X = M + A, M 2 M2 , A 2 V, (5.6.26)
such that
[N, A] is a martingale for all N 2 M2 (5.6.27)
R
and
E[[X, X]T ] = E[[M, M ]T ] + E[[A, A]T ] (5.6.28)
D
and further, the decomposition (5.6.26) is unique under the requirement (5.6.27).
Proof. As seen in Theorem 4.30, X being a stochastic integrator for the filtration (F⇧ )
implies that X is also a stochastic integrator for the filtration (F⇧+ ). Also, (4.6.2) implies
that [X, X] does not depend upon the underlying filtration, so the assumptions of the
Theorem continue to be true when we take the underlying filtration to be (F⇧+ ). Now
Theorem 5.37 yields a decomposition X = M̃ + Ã with M̃ 2 M2 (F⇧+ ) and E[[N, Ã]T ] = 0
for all N 2 M 2 (F⇧+ ). Let Mt = M̃t^T , At = Ãt^T . Then M 2 M2 (F⇧+ ) and E[[N, A]T ] = 0
for all N 2 M 2 (F⇧+ ) since [N, A]t = [N, Ã]t^T (by (4.6.9)). As a consequence,
E[[X, X]T ] = E[[M, M ]T ] + E[[A, A]T ].

Thus E[[A, A]T ] < 1 and then by Lemma 5.39, we have [N, A] is a (F⇧+ )-martingale
for all N 2 M2 (F⇧+ ). Since the underlying filtration (F⇧+ ) is right continuous, Lemma 5.41
implies that A 2 V, namely paths of A have finite variation. By construction, M, A are
(F⇧+ ) adapted. Since for s < t, Fs+ ✓ Ft , it follows that At = At is Ft measurable. We
will show that
At is Ft measurable 8t > 0. (5.6.29)
Since Xt is Ft measurable, it would follow that Mt = Xt At is also Ft measurable. This
will also imply M 2 M2 = M2 (F⇧ ) completing the proof.
Fix t > 0. Let U be a bounded Ft+ measurable random variable and let V = U E[U |
Ft ]. Let
Ns = V 1[t,1) (s)
i.e. Ns = 0 for s < t and Ns = V for s t. It is easy to see that N 2 M2 (F⇧+ ) and
T
that [N, A]s = V ( A)t 1[t,1) (s) (using (4.6.10)). Thus [N, A] is a (F⇧+ )-martingale, and in
particular E[[N, A]t ] = 0. Hence we conclude that for all bounded Ft+ measurable U
E[( A)t U ] = E[( A)t E[U | Ft ]]. (5.6.30)
F
Invoking Lemma 5.42 we conclude that ( A)t is Ft measurable and hence that At is Ft
measurable. As noted earlier, this implies M 2 M2 . Only remains to prove uniqueness of
A
decomposition satisfying 5.6.27. Let X = Z + B be another decomposition with Z 2 M2 ,
B 2 V and [N, B] being a martingale for all N 2 M2 .
Now X = M + A = Z + B, B A = M Z 2 M2 and [N, B A] is a martingale
R
for all N 2 M2 . Let N = M Z = B A. By definition, M0 = Z0 = 0 and so

N0 = 0. Now [N, B A] is a martingale implies [B A, B A] = [M Z, M Z] is a
martingale and as a consequence, we have E[[M Z, M Z]T ] = E[[M Z, M Z]0 ] = 0
(recall [M Z, M Z]0 = 0, see Remark 4.66). Now invoking (5.3.22), we conclude (since
D
M Z 2 M2 and M0 = Z0 = 0)
E[sup|Ms Zs |] = 0.
sT
Thus M = Z and as a consequence A = B. This completes the proof.
Corollary 5.44. The processes M, A in (5.6.26) satisfy

Mt = Mt^T , At = At^T 8t 0 (5.6.31)
Proof. Note that Xt = Xt^T . Let Rt = Mt^T and Bt = At^T . Then X = R + B is also a
decomposition that satisfies (5.6.26) since R is also a square integrable martingale, B is a
process with finite variation paths and if R is any square integrable martingale, then
[N, B]t = [N, A]t^T
and hence [N, B] is also a martingale. Now uniqueness part of Theorem 5.43 implies
(5.6.31).
Corollary 5.45. Suppose X, Y are stochastic integrators satisfying conditions of Theo-

rem 5.43 and let X = M +A and Y = N +B be decompositions with M, N 2 M2 , A, B 2 V
and [U, A], [U, B] being martingales for all U 2 M2 . If for a stop time , X [ ] = Y [ ] , then
M [ ] = N [ ] and A[ ] = B [ ] .
Proof. Follows by observing that X [ ] is also a stochastic integrator and X [ ] = M [ ] + A[ ]

and X [ ] = N [ ] + B [ ] are two decompositions, both satisfying (5.6.27). The conclusion
follows from the uniqueness part of Theorem 5.43.
T
We now introduce two important definitions.
Definition 5.46. An adapted process B is said to be locally integrable if there exist stop
P(! : sup
0t⌧n (!)
F
times ⌧n increasing to 1 and random variables Dn such that E[Dn ] < 1 and
|Bt (!)|  Dn (!)) = 1 8n 1.
A
The condition above is meaningful even if sup0t⌧n (!) |Bt (!)| is not measurable. It
is to be interpreted as - there exists a set ⌦0 2 F with P(⌦0 ) = 1 such that the above
inequality holds for ! 2 ⌦0 .
R
Definition 5.47. An adapted process B is said to be locally square integrable if there exist
stop times ⌧n increasing to 1 and random variables Dn such that E[Dn2 ] < 1 and
D
P(! : sup |Bt (!)|  Dn (!)) = 1 8n 1.

0t⌧n (!)
Clearly, if B is locally bounded process then it is locally square integrable. Easy to

see that a continuous adapted processes Y is locally bounded if Y0 is bounded, is locally
integrable if E[ |Y0 | ] < 1 and locally square integrable if E[ |Y0 |2 ] < 1. Indeed, the same
is true for an r.c.l.l. adapted process if its jumps are bounded.
We have seen that for an r.c.l.l. adapted process Z, the process Z is locally bounded
and hence it follows that Z is locally integrable if and only if the process Z is locally
integrable and likewise, Z is locally square integrable if and only if the process Z is locally
square integrable.
Theorem 5.48. Let X be locally square integrable stochastic integrator. Then X admits a
decomposition X = M + A where M 2 M2loc (M is a locally square integrable martingale)
and A 2 V (A is a process with finite variation paths) satisfying
[A, N ] 2 M2loc 8N 2 M2loc . (5.6.32)
Further, such a decomposition is unique.
Proof. Since X is a locally square integrable process, it follows that X is locally square
integrable. Since [X, X] = ( X)2 , it follows that [X, X] is locally integrable and thus so
is Dt = supst |Xs |2 + [X, X]t . Let n " 1 be stop times such that E[D n ] < 1 and let
n
⌧ n = n ^ n . Let X n = X [⌧ ] . Then X n satisfies conditions of Theorem 5.43 (with T = n)
and thus we can get decomposition X n = M n + An such that M n 2 M2 . An 2 V and
[U, An ] is a martingale for all U 2 M2 . (5.6.33)
T
Using Corollary 5.45, we can see that
P(Mtn = Mtk 8t  ⌧ n ^ ⌧ k ) = 1, 8n, k.
n n
Thus we can define r.c.l.l. processes M, A such that M [⌧ ] = M n and A[⌧ ] = An . This
decomposition satisfies the asserted properties.F
Uniqueness follows as in Theorem 5.43 and the observation that if Y 2 M2loc , Y0 = 0
A
and [Y, Y ]t = 0 for all t then Y = 0 (i.e. P(Yt = 0 8t) = 1.)
Remark 5.49. The process A with finite variation r.c.l.l. paths appearing in the above theorem
was called a Natural process by Meyer and it appeared in the Doob Meyer decomposition of
R
supermartingales. Later it was shown that such a process is indeed a predictable process. A is
also known as the compensator of X. We will come back to this in Chapter 8 later
Corollary 5.50. Let X be a locally square integrable stochastic integrator and A be its
D
compensator and M = X A 2 M2loc . Then for any stop time such that E[ [X, X] ] < 1,
E[ [A, A] ]  E[ [X, X] ] (5.6.34)
and
E[ [M, M ] ]  E[ [X, X] ] (5.6.35)
Proof. If ⌧n " 1 are as in the proof of Theorem 5.48, then by Theorem 5.43 we have
E[[X, X] ^⌧n ] = E[[M, M ] ^⌧n ] + E[[A, A] ^⌧n ].
and the required inequalities folow by taking limit as n ! 1 and using monotone conver-
gence theorem.
Arguments similar to the ones leading to Theorem 5.48 yield the following (we use
Theorem 5.38 and Remark 5.40). We also use the fact that every continuous process is
locally bounded and hence locally square integrable.
Theorem 5.51. Let X be locally square integrable stochastic integrator. Then X admits
a decomposition X = N + Y with N 2 Mc,loc ( N is a continuous locally square integrable
martingale with N0 = 0) and Y is a locally square integrable stochastic integrator satisfying
[Y, U ] is a local martingale 8U 2 M2c . (5.6.36)
Further, such a decomposition is unique and
[Y, U ] = 0 8U 2 M2c . (5.6.37)
Proof. The only new part is to show that (5.6.36) yields (5.6.37). For this note that on
T
one hand [Y, U ] is continuous as [Y, U ] = ( Y )( U ) and U is continuous and on the
other hand by definition [Y, U ] has finite variation paths. Thus [Y, U ] is a continuous local
martingale with finite variation paths. Hence by Theorem 5.19, [Y, U ] = 0.
F
As an immediate consequence of the Theorem 5.48, here is a version of the Bichteler-
Dellacherie-Meyer-Mokobodzky Theorem. See Theorem 5.78 for the final version.
A
Theorem 5.52. Let X be an r.c.l.l. adapted process. Then X is a stochastic integrator if
and only if X is a semimartingale.
R
Proof. We have already proved (in Theorem 5.34) that if X is a semimartingale then X is
a stochastic integrator.
For the other part, let X be a stochastic integrator. Let us define
D
X
Bt = X0 + ( X)s 1{|( X)s |>1} . (5.6.38)
0<st
Then as noted at the beginning of the section, B is an adapted r.c.l.l. process with finite
variation paths and is thus a stochastic integrator. Hence Z = X B is also a stochastic
integrator. By definition,
( Z) = ( X)1{| X|1}
and hence jumps of Z are bounded by 1. Hence Z is locally square integrable. Hence by
Theorem 5.48, Z admits a decomposition Z = M + A where M 2 M2loc and A is a process
with finite variation paths. Thus X = M + (B + A) and thus X is a semimartingale.
The result proven above contains a proof of the following fact, which we record here
for later reference.
Corollary 5.53. Every semimartingale X can be written as X = M +A where M 2 M2loc

and A 2 V i.e. M is a locally square integrable r.c.l.l. martingale with M0 = 0 and A is an
r.c.l.l. process with finite variation paths.
Every local martingale X is a semimartingale by definition. In that case, the process

A appearing above is also a local martingale. Thus we have
Corollary 5.54. Every r.c.l.l. local martingale N can be written as N = M + L where

M is a locally square integrable r.c.l.l. martingale with M0 = 0 and L is an r.c.l.l. process
with finite variation paths that is also a local martingale i.e. M 2 M2loc and L 2 V \ Mloc .
T
Using the technique of separating large jumps from a semimartingale to get a locally
bounded semimartingale used in proof of Theorem 5.78, we can get the following extension
of Theorem 5.51.
F
Theorem 5.55. Let X be a stochastic integrator. Then X admits a decomposition X =
N +S with N 2 Mc,loc ) ( N is a continuous locally square integrable martingale with N0 = 0)
A
and S is a stochastic integrator satisfying
[S, U ] = 0 8U 2 M2c . (5.6.39)

R
Further, such a decomposition X = N + S is unique.
Proof. Let B be defined by (5.6.38) and let Z = X B. Then Z is locally bounded and
D
thus invoking Theorem 5.51, we can decompose Z as Z = N + Y with N 2 Mc,loc and Y

satisfying [Y, U ] = 0 for all U 2 M2c . Let S = Y + B. Since [B, U ] = 0 for all U 2 M2c , it
follows that X = N + S and [S, U ] = 0 for all U 2 M2c . To see that such a decomposition
is unique, if X = M + R is another such decomposition with M M2c and [R, U ] = 0 for all
U 2 M2c , then V = N M = R S 2 Mc,loc with [V, V ] = 0 and hence V = 0 by Theorem
5.19.
Definition 5.56. Let X be a semimartingale. The continuous local martingale N such that
X = N + S and [S, U ] = 0 for all U 2 Mc,loc is said to be the continuous local martingale
part of X and is denoted by X (c) .
For a semimartingale X with X = X (c) + Z, we can see that [X, X] = [X (c) , X (c) ] +
[Z, Z]. We will later show in Theorem 8.76 that indeed [X (c) , X (c) ] = [X, X](c) - the
continuous part of the quadratic variation of X.
The next result shows that if X is a continuous process that is a semimartingale, then
it can be uniquely decomposed as a sum of a continuous local martingale and a continuous
process with finite variation paths.
Theorem 5.57. Let X be a continuous process and further let X be a semimartingale.
Then X can be uniquely decomposed as
X =M +A
where M and A are continuous processes, M0 = 0, M a local martingale and A a process
with finite variation paths.
T
Proof. Without loss of generality, we assume X0 = 0. Now X being continuous, it follows
that X is locally square integrable and thus X admits a decomposition X = M + A with
M 2 M2loc and A 2 V with A satisfying (5.6.32). On one hand, continuity of X implies
( M )t = ( A)t for all t > 0 and since A 2 V, we have
[A, M ]t =
X
F
( A)s ( M )s .
0<st
A
Thus,
X
[A, M ]t = ( A)2s = [A, A]t .
0<st
Since A satisfies (5.6.32), it follows that [A, M ] = [A, A] is a local martingale. If n is a
R
localizing sequence, it follows that E[[A, A]t^ n ] = 0 for all n. Since [A, A]s 0 for all s, it
follows that [A, A]t^ n = 0 a.s. for all t, n. This implies
X
[A, A]t = ( A)2s = 0 a.s. 8t
D
0<st
and hence A is a continuous process and hence so is M = X A. Uniqueness follows from
Theorem 5.19.
Exercise 5.58. Let X be a continuous semimartingale and let X = M +A be a decomposition

as in Theorem 5.57 with M 2 Mc,loc with M0 = 0 and A 2 V. Let X = N + B be any
decomposition with N 2 Mloc and B 2 V. Then [N, N ] [M, M ] is an increasing process, i.e.
[N, N ] = [M, M ] + C, for some C 2 V+ . (5.6.40)
Hint: Observe that [M, A B] = 0 since M is continuous. Write N = M + (A B) and take
C = [A B, A B].
5.7. The Class L(X) 195
We have earlier introduced the class Mc of continuous martingales with M0 = 0. Let

Md denote the class of martingales N 2 M such that
[M, N ] = 0 8t, 8M 2 Mc . (5.6.41)
Md is the class of purely discontinuous martingales. Likewise, we define Md,loc to be the

class of M 2 Mloc such that (5.6.41) is true for all N 2 Mc,loc and such M are called purely
discontinuous local martingales. Also, Md,loc \ M2loc is denoted by M2d,loc . We will now
show that every local martingale can be (uniquely) decomposed as a sum of a continuous
local martingale and a purely discontinuous local martingale.
Theorem 5.59. Let X be an r.c.l.l. local martingale. Then X admits a decomposition
X = M + N, M 2 Mc,loc , N 2 Md,loc . (5.6.42)
T
Proof. Let
X
Bt = X0 + ( X)s 1{|( X)s |>1}
0<st
F
and let Y = X B. Then B is an adapted r.c.l.l. process with finite variation paths and Y
is a stochastic integrator with jumps bounded by 1 and hence is locally square integrable.
Then invoking Theorem 5.51, we get a decomposition
A
Y =M +A
where M 2 Mc,loc and A is a locally square integrable stochastic integrator such that
R
[A, S]t = 0 for all S 2 M2c . Since B 2 V, it follows that [B, S] = 0 for all S 2 M2c . Defining
N = A + B = X M , we get that [N, S] = 0 for all S 2 M2c and since X, M are local
martingales, it follows that so is N .
D
Remark 5.60. Here, if X 2 M2loc then M 2 M2c,loc and N 2 M2d,loc . We will later show in
Theorem 8.73 that in this case [M, M ] is the continuous part of [X, X] and [N, N ] is the sum
of squares of jumps of X.
5.7 The Class L(X)

In the previous section, we have given a characterization of stochastic integrators. Like
R
stochastic integrators, the class L(X) of integrands for the integral f dX had been defined
in an ad-hoc fashion. Here we give a concrete description of L(X).
Theorem 5.61. Let X be a stochastic integrator. Then a predictable process f belongs

to L(X) if and only if X admits a decomposition X = M + A, where M 2 M2loc (M is a
locally square integrable martingale with M0 = 0) and A 2 V (A is a process with finite
variation paths) such that
Z t
|fs |d|A|s < 1 8t < 1 a.s. (5.7.1)
0
and there exist stop times k " 1 such that
Z k
E[ |fs |2 d[M, M ]s ] < 1 8t < 1. (5.7.2)
0
Proof. If f satisfies (5.7.1), then as seen in Remark 4.22 f 2 L(A) and if f satisfies (5.7.2),
then f 2 L2m (M ) ✓ L(M ). Thus if X admits a decomposition X = M + A such that
(5.7.1)-(5.7.2) holds then f 2 L(M ) \ L(A) ✓ L(M + A).
Conversely, let f 2 L(X). Then easy to see that h = (1 + |f |) 2 L(X). So let
T
R
Y = (1 + |f |)dX. Then as noted in Theorem 4.29, Y is a stochastic integrator. Hence by
Corollary 5.53, Y admits a decomposition Y = N + B and with N 2 M2loc and B 2 V. Let
Z
M = (1 + |f |) 1 dN,
Z F
A = (1 + |f |) 1 dB.
A
The two integrals are defined as (1 + |f |) 1 is bounded. Further, this also yields, M 2 M2loc
and A 2 V. Clearly
Z Z
M + A = (1 + |f |) 1 dY = (1 + |f |) 1 (1 + |f |)dX = X.
R
Since g = f · (1 + |f |) 1 is bounded, g 2 L(Y ) and hence f = g · (1 + |f |) 2 L(X) (see

Theorem 4.29).
D
Exercise 5.62. Let M be a continuous martingale with M0 = 0.

(i) Let M = N + B be any decomposition with N 2 M2loc and B 2 V and let f 2 L2m (N ).
Show that f 2 L2m (M ).
Hint: Use (5.6.40).
(ii) Show that L(M ) = L2m (M ).
(iii) Show that

Z t
L(M ) = {f : predictable such that fs2 d[M, M ]s < 1}. (5.7.3)
0
Hint: Use Remark 5.28.
5.7. The Class L(X) 197
Remark 5.63. It follows that for a Brownian motion B,

Z t
L(B) = {f : predictable such that fs2 ds < 1}.
0
Definition 5.64. For a process A with finite variation paths, let L1l (A) be the class of
predictable processes f satisfying (5.7.1).
Thus, L1l (A) ✓ L(A). The Theorem 5.61 can be recast as: For a stochastic integrator
X, f 2 L(X) if and only if X admits a decomposition X = M + A, where M is a locally
square integrable martingale with M0 = 0 and A is a process with finite variation paths
such that
f 2 L2m (M ), and f 2 L1l (A).
As a consequence, for a semimartingale X
[
L(X) = L2m (M ) \ L1l (A) .
T
{M,A :X=M +A, M 2M2loc , A2V}
Exercise 5.65. Let X be a continuous semimartingale and let X = M + A be the unique

decomposition with M being continuous local martingale and A 2 V. Then show that
F
L(X) = L2m (M ) \ L1l (A).
Hint: To show , L(X) ✓ L2m (M ) \ L1l (A) use Exercise 5.58.
A
The following exercise gives an example of a process A 2 V such that L(A) is strictly
larger than L1l (A).
Exercise 5.66. Let {⇠ k,m : 1  k  2m 1, m 1} be a family of independent identically
R
distributed random variables with

P(⇠ 1,1 = 1) = P(⇠ 1,1 = 1) = 0.5
2k 1
and let ak,m = 2m . Let
D
Ft = {⇠ k,m : ak,m  t},

n 2X m 1
X 1
Ant = ⇠ k,m 1[an,m ,1) (t),
22m
m=1 k=1
1 2X m 1
X 1
At = ⇠ k,m 1[an,m ,1) (t)
22m
m=1 k=1
and f : [0, 1) 7! [0, 1) be defined by
f (ak,m ) = 2m
with f (t) = 0 otherwise. Show that
(i) For each n, (Ant , Ft ) is a martingale.
(ii) For each t, Ant converges to At in L2 (P).
(iii) (At , Ft ) is a martingale.
(iv) A 2 V.
Rt
(v) Let Bt = |A|t . Show that 0 f (s)dBs = 1.
P1 P 2m 1
1
(vi) Show that [A, A]t = m=1 k=1 1 n,m ,1) (t).
24m [a
R1
(vii) Show that 0 f 2 (s)d[A, A]s < 1.
Rt
T
Thus 0 f dA is defined as a stochastic integral but not defined as a Riemann-Stieltjes integral.
5.8 The Bichteler-Dellacherie-Meyer-Mokobodzky Theorem

F
In Theorem 5.52 we have shown that an r.c.l.l. adapted process is a stochastic integrator if
and only if it is a semimartingale. Even if we demand seemingly weaker requirements on
A
an adapted r.c.l.l. process X it implies that it is a semimartingale. Indeed if we demand
that JX (f n ) ! JX (f ) with the strongest form of convergence on the domain S- namely
uniform convergence and the weakest form of convergence on the range R0 (⌦, (F⇧ ), P)-
R
namely convergence in probability for every t, then it follows that X is a semimartingale.

To be precise, we make the following definition:
Definition 5.67. Let X be an r.c.l.l. adapted process. Then X is said to be a weak stochastic
D
integrator if
f n 2 S, f n ! 0 uniformly ) JX (f n )t ! 0 in probability for each t < 1.
The Bichteler-Dellacherie-Meyer-Mokobodzky Theorem (first proven by Dellacherie

with contributions from Meyer, Mokobodzky and then independently proven by Bichteler)
states that X is a weak stochastic integrator if and only if it is a semimartingale. If X is
a semimartingale then it is a stochastic integrator. Clearly, if X is a stochastic integrator,
then it is a weak stochastic integrator. To complete the circle, we will now show that if X
is a weak stochastic integrator, then it is a semimartingale.
5.8. The Bichteler-Dellacherie-Meyer-Mokobodzky Theorem 199
Towards this goal, we introduce some notation. Let S+ be the class of stochastic
processes f of the form
m
X
fs (!) = aj+1 (!)1(sj ,sj+1 ] (s) (5.8.1)
j=0
where 0 = s0 < s1 < s2 < . . . < sm+1 < 1, aj+1 is bounded Fs+j measurable random
variable, 0  j  m, m 1 and let C be the class of stochastic processes f of the form
Xn
fs (!) = bj+1 (!)1( j (!), j+1 (!)] (s) (5.8.2)
j=0
where 0 = 0  1  2  . . . ,  n+1 < 1 are (F·+ ) bounded stop times and bj+1 is
bounded F +j measurable random variable, 0  j  n, n 1.
For f 2 C, let us define
n
X
T
IX (f )t (!) = bj+1 (!)(X j+1 ^t (!) X j ^t (!)). (5.8.3)
j=0
So for f 2 S, JX (f ) = IX (f ). Indeed, if X is a stochastic integrator, then as noted

R
earlier, IX (f ) = f dX, 8f 2 C.
We start with a few observations. F
Lemma 5.68. Let X be an r.c.l.l. adapted process, f 2 C and ⌧ be a stop time. Then we
A
have, for all t < 1
IX (f 1[0,⌧ ] )t = IX (f )t^⌧ . (5.8.4)
Proof. Let f be given by (5.8.2) and let g = f 1[0,⌧ ] . Then we have

R
n
X
gs = bj+1 1( j ^⌧, j+1 ^⌧ ]
(s)
j=0
D
and writing dj+1 = bj+1 1{ j ⌧ }

, it follows that dj+1 is F +j ^⌧ measurable and we have
n
X
gs = dj+1 1( j ^⌧, j+1 ^⌧ ]
(s).
j=0
Since IX (f ) and IX (g) are defined pathwise, we can verify that the relation (5.8.4) is
true.
Lemma 5.69. Let X be an r.c.l.l. adapted process. Then X is a weak stochastic integrator
if and only if X satisfies the following condition for each t < 1:
8" > 0 9K" < 1 s.t. [ sup P(|JX (f )t | > K" )]  ". (5.8.5)
f 2S, |f |1
Proof. If X satisfies (5.8.5), then given f n 2 S, an = supt,! |ftn (!)| ! 0, we need to show
JX (f n )t ! 0 in probability. So given " > 0, ⌘ > 0, get K" as in (5.8.5). Let n0 be such
that for n n0 , we have an K" < ⌘. Then gn = a1n f n 2 S and |gn |  1. Hence
P(|JX (f n )t | ⌘)  P(|JX (g n )t | > K" )  ".
Thus X is a weak stochastic integrator. Conversely let X be a weak stochastic integrator.

If for some ", t < 1, no such K" < 1 exists, then for each n, we will get f n such that
|f n |  1 and
P(|JX (f n )t | > n) ". (5.8.6)
Then g n = n1 f n converges uniformly to zero, but in view of (5.8.6),
P(|JX (g n )t | > 1) " 8n 1.
T
This contradicts the assumption that X is a weak stochastic integrator.
Lemma 5.70. Let X be an r.c.l.l. adapted process. Then X satisfies (5.8.5) if and only if
for each t < 1
8" > 0 9K" < 1 s.t. [ F

sup
f 2C, |f |1
P(|IX (f )t | > K" )]  ". (5.8.7)
A
Proof. Since f 2 S implies f 1(0,1) 2 C, it is easy to see that (5.8.7) implies (5.8.5).
So now suppose K" is such that (5.8.5) holds. We show that (5.8.7) holds. First let
f 2 S+ be given by
m
X1
R
fs (!) = aj+1 (!)1(sj ,sj+1 ] (s)

j=0
where 0 = s0 < s1 < s2 < . . . < sm < 1, aj+1 is bounded Fs+j measurable random variable,
D
0  j  (m 1). Let 0 < k < k1 be such that sj + k < sj+1 , 0  j  m and let
m
X1
gsk (!) = aj+1 (!)1(sj + k ,sj+1 ]
(s).
j=0
Since Fs+j ✓ Fsj + k , it follows that g k 2 S. Noting that g k converges to f and using the
explicit formula for IX , JX , we see that (the number of terms remain fixed!)
JX (g k )t ! IX (f )t .
Hence we conclude that

P(|IX (f )t | > K" )  ".
In other words, (5.8.5) implies

8" > 0 9K" < 1 s.t. [ sup P(|IX (f )t | > K" )]  ". (5.8.8)
f 2S+ , |f |1
Let us note that if f 2 C is given by (5.8.2) with j being simple stop times, namely taking
finitely many values, then f 2 S+ . To see this, let us order all the values that the stop
times j j = 0, 1, . . . , n take and let the ordered list be s0 < s1 < s2 < s3 < . . . < sk .
Recall that by construction, f is l.c.r.l. adapted and thus
bj = lim f (u)
u#sj
exists and is Fs+j measurable. And then

k 1
X
fs = bj 1(sj ,sj+1 ] (s).
j=0
T
Now returning to the proof of (5.8.7), let f 2 C be given by
n
X1
fs = bj+1 1( j , j+1 ]
(s)
j=0
F
with 0 = 0  1  2  . . . ,  n < 1 are (F·+ ) bounded stop times and bj is bounded
F +j measurable random variable, 0  j  (n 1). Let
A
[2m
j] + 1
⌧jm = , m 1
2m
be simple stop times decreasing to j , 0  j  n, and let
R
n
X1
gsm = bj+1 1(⌧jm ,⌧j+1
m ] (s).
j=0
Then g m converges to f and from the explicit expression for IX (g m ) and IX (f ), it follows
D
that IX (g m ) converges to IX (f ). As noted above g m 2 S+ and hence

P(|IX (g m )t | > K" )  "
and then IX (g m )t ! IX (f )t implies
P(|IX (f )t | > K" )  ".
Since this holds for every f 2 C, (5.8.7) follows.
The preceding two lemmas lead to the following interesting result. The convergence
for each t in the definition of weak stochastic integrator leads to the apparently stronger
result- namely convergence in ducp .
Theorem 5.71. Let X be a weak stochastic integrator. Then f n 2 C, f n ! 0 uniformly

implies
ucp
IX (f n ) ! 0. (5.8.9)
As a consequence, X satisfies (4.2.20).
Proof. Fix f n 2 C such that f n ! 0 uniformly. Proceeding as in the proof of Lemma 5.69,
one can show using (5.8.7) that for each t,
IX (f n )t ! 0 in probability. (5.8.10)
Fix ⌘ > 0, T < 1. For n 1, let
⌧ n = inf{t 0 : |IX (f n )t | > 2⌘}.
⌧ n is a stop time with respect to the filtration (F·+ ). Let g n = f n 1[0,⌧ n ] . Note that g n 2 C.
T
In view of Lemma 5.68 we have
IX (g n )T = IX (f n )T ^⌧ n .
Also, from definition of ⌧ n , we have
0tT
F
{ sup |IX (f n )t | > 2⌘} ✓ {|IX (g n )T | > ⌘}.
Clearly, g n converges to 0 uniformly and hence as noted in (5.8.10),

(5.8.11)
A
IX (g n )t ! 0 in probability.
In view of (5.8.11), this proves (5.8.9). As seen in Remark 4.23, (5.8.9) implies (4.2.20).
R
Here is one last observation in this theme.
Theorem 5.72. Let X be a weak stochastic integrator and let hn 2 C. Then

D
ucp ucp
hn ! 0 ) IX (hn ) ! 0. (5.8.12)
Proof. Fix T < 1 and let n1 = 1. For each k 2, get nk such that nk > nk 1 and
n nk ) P( sup |hnt | > k1 )  k1 .
0tT
For nk  n < nk+1 , let

n = inf{t : |hnt | > k1 }.
Since hn 2 C, (a left continuous step function) it can be seen that n is a stop time and
that
f n = hn 1{[0, n ]}
satisfies
|ftn |  1
k for nk  n < nk+1
and
{ sup |hnt | > k1 } = { n  T }.
0tT
So
1
P( n  T)  k for nk  n < nk+1 . (5.8.13)
Thus
f n converges to 0 uniformly (5.8.14)
and
P(IX (f n )t = IX (hn )t 8t 2 [0, T ]) P( n > T ). (5.8.15)
T
ucp
In view of Theorem 5.71, (5.8.14) implies IX (f n ) ! 0 and then (5.8.13) and (5.8.15)
yield the desired conclusion, namely
ucp
IX (hn ) ! 0.
F
In view of this result, for a weak stochastic integrator, we can extend IX continuously
A
to the closure C̄ of C in the ducp metric.
ucp
For g 2 C̄, let IX (g) be defined as limit of IX (g n ) where g n ! g. It is easy to see
R
that IX is well defined. If X is a stochastic integrator, IX agrees with gdX.
R
We identify C̄ in the next result.
Lemma 5.73. The closure C̄ of C in the ducp metric is given by

D
C̄ = {Z : Z 2 R0 }.
ucp
Proof. Let f 2 C̄ and let f n 2 C, f n ! f . Then Vtn = limu#t fun are r.c.l.l. adapted
processes and V n can be seen to be Cauchy in ducp and hence converge to V . Further,
using Theorem 2.69, it follows that a subsequence of V n converges to V uniformly on [0, T ]
for every T < 1, almost surely. Thus V 2 R0 . Now it follows that f = V .
Theorem 5.74. Let X be a weak stochastic integrator and Z 2 R0 . Let {⌧nm : n 1} be

a sequence of partitions of [0, 1) via stop times:
0 = ⌧0m < ⌧1m < ⌧2m . . . ; ⌧nm " 1, m 1

such that for some sequence m # 0 (of real numbers)

|Zt Z⌧nm |  m for ⌧nm < t  ⌧n+1
m
, n 0, m 1 (5.8.16)
for k 1, let
1
X
Ztm = Zt^⌧nm 1(⌧nm ,⌧n+1
m ] (t).
n=0
Then
1
X
IX (Z m ) = Zt^⌧nm (X⌧n+1
m ^t X⌧nm ^t ) (5.8.17)
n=0
and
ucp
IX (Z m )
! IX (Z ). (5.8.18)
R
Thus, if X is also a stochastic integrator, IX (f ) = f dX.
T
Proof. Let us note that given m # 0, {⌧nm : n 1} m 1, satisfying (5.8.16) exist, (say
given in (4.5.12)).
For k 1, let
k
X
Then Z m,k 2 C and

Ztm,k =
n=0
F
Zt^⌧nm 1(⌧nm ,⌧n+1
m ] (t).
A
k
X
m,k
IX (Z )= Zt^⌧nm (X⌧n+1
m ^t X⌧nm ^t ).
n=0
Now P(sup0tT |Ztm,k Z m| > 0)  P(⌧km < T ) and hence Z m 2 C̄ and

R
ucp
IX (Z m,k ) ! IX (Z m ).
This proves (5.8.17). Now Z m converges to Z uniformly and hence Z 2 C̄ and
ucp
IX (Z m ) ! IX (Z ).
D
If X is also a stochastic integrator, using Theorem 4.57 it follows that for Z 2 R0 ,

R
IX (Z ) agrees with Z dX.
Remark 5.75. Note that while dealing with weak stochastic integrators, we considered the
filtration F·+ for defining the class C, but the definition of weak stochastic integrator did not
require the underlying filtration to be right continuous.
Thus for Z 2 R0 and a weak stochastic integrator X, we define IX (Z ) to be the

R
stochastic integral Z dX. When a weak stochastic integrator is also a stochastic inte-
grator, this does not lead to any ambiguity as noted in the previous Theorem.
Remark 5.76. A careful look at results in section 4.6 show that Theorem 4.59, Theorem
4.62 continue to be true if the underlying processes are weak stochastic integrators instead of
stochastic integrators. Instead of invoking Theorem 4.57, we can invoke Theorem 5.74. Thus
weak stochastic integrators X, Y admit quadratic variations [X, X], [Y, Y ] and cross-quadratic
variation [X, Y ]. Various results on quadratic variation obtained in section 4.6 continue to be
true for weak stochastic integrators.
Moreover, Theorem 5.37, Theorem 5.38 and Lemma 5.39 are true for weak stochastic
integrators as well since the proof only relies on quadratic variation. Likewise, Lemma 5.41 is
true for weak stochastic integrators since apart from quadratic variation, it relies on (4.2.20),
a property that holds for weak stochastic integrators as noted earlier in Remark 4.23.
As a consequence, Theorem 5.43, Theorem 5.48 and Theorem 5.51 are true for weak
stochastic integrators.
T
This discussion leads to the following result, whose proof is same as that of Theorem
5.52.
F
Theorem 5.77. Let X be a weak stochastic integrator. Then X is a semimartingale.
Here is the full version of the Bichteler-Dellacherie-Meyer-Mokobodzky Theorem.

A
Theorem 5.78. Let X be an r.c.l.l. (F· ) adapted process. Let JX be defined by (4.2.1)-
(4.2.2). Then the following are equivalent.
(i) X is a weak stochastic integrator, i.e. if f n 2 S, f n ! 0 uniformly, then JX (f n )t ! 0

R
in probability 8t < 1.
ucp
(ii) If f n 2 S, f n ! 0 uniformly, then JX (f n ) ! 0.
D
ucp ucp
(iii) If f n 2 S, f n ! 0 , then JX (f n ) ! 0.
bp ucp
(iv) If f n 2 S, f n ! 0 , then JX (f n ) ! 0.
(v) X is a stochastic integrator, i.e. the mapping JX from S to R0 (⌦, (F⇧ ), P) has an
e P) 7! R0 (⌦, (F⇧ ), P) satisfying
extension JX : B(⌦,
bp ucp
f n ! f implies JX (f n ) ! JX (f ).
(vi) X is a semimartingale, i.e. X admits a decomposition X = M + A where M is a local

martingale and A is a process with finite variation paths.
(vii) X admits a decomposition X = N + B where N is a locally square integrable martin-

gale and B is a process with finite variation paths.
Proof. Equivalence of (v), (vi), (vii) has been proven in Theorem 5.52 and Corollary 5.53.
Clearly,
(v) ) (iv) ) (iii) ) (ii) ) (i).
Theorem 5.71 and Theorem 5.72 tell us that
(i) ) (ii) ) (iii).
And we have observed in Theorem 5.77 that (iii) implies (vi). This completes the proof.
5.9 Enlargement of Filtration
T
The main result of the section is about enlargement of the underlying filtration (F⇧ ) by
adding a set A 2 F to each Ft . The surprising result is that a semimartingale for the
original filtration remains a semimartingale for the enlarged filtration. In the traditional
F
approach, this was a deep result as it required decomposition of the semimartingale into
local martinagle w.r.t. the enlarged filtration and a finite variation process.
Let A 2 F be fixed and let us define a filtration (G⇧ ) by
A
Gt = {(B \ A) [ (C \ Ac ) : B, C 2 Ft }. (5.9.1)
It is easy to see that Gt is a -field for all t 0 and (G⇧ ) is a filtration. Using the
R
description (5.9.1) of sets in Gt , it can be seen that if ⇠ is a Gt measurable bounded random

variable, then 9 Ft measurable bounded random variables ⌘, ⇣ such that
⇠ = ⌘ 1A + ⇣ 1Ac . (5.9.2)
D
Let S(G⇧ ) denote the class of simple predictable process for the filtration (G⇧ ). Using (5.9.2)
it is easy to verify that for f 2 S(G⇧ ) 9 g, h 2 S(F⇧ ) such that
e
f (t, !) = g(t, !)1A (!) + h(t, !)1Ac (!) 8(t, !) 2 ⌦. (5.9.3)
With this we can now describe the connection between predictable processes for the two
filtrations.
Theorem 5.79. Let f be an (G⇧ )-predictable process. We can choose (F⇧ ) predictable
processes g, h such that (5.9.3) holds. Further, if f is bounded by a constant c, then g, h
can also be chosen to be bounded by the same constant c.
5.9. Enlargement of Filtration 207
Proof. Let K be the set of (G⇧ )-predictable process f for which the conclusion is true.
We have seen that K contains S(G⇧ ). We next show that K is closed under pointwise
convergence. This will show in particular that K is closed under bp-covergence and hence
that the conclusion is true for all bounded predictable processes. If f n 2 K with
f n = g n 1 A + hn 1 A c
and f n ! f then we can take
gt (!) = lim sup gtn (!)1{lim supn!1 |gtn |(!)<1} (5.9.4)

n!1
ht (!) = lim sup hnt (!)1{lim supn!1 |hnt |(!)<1} (5.9.5)

n!1
and then it follows that f = g 1A + h1Ac and thus f 2 K. As noted above, this proves
K contains all bounded predictable process and in turn all predictable processes since
T
f n = f 1{|f n |n} converges pointwise to f .
If f is bounded by c, we can replace g by g̃ = g 1{|g|c} and h by h̃ = h1{|h|c} .
Theorem 5.80. Let X be a semimartingale for the filtration (F⇧ ). Let A 2 F and (G⇧ ) be
defined by (5.9.1). F
Then X is also a semimartingale for the filtration (G⇧ ).
A
Proof. Let us denote the mapping defined by (4.2.1) and (4.2.2) for the filtration (G⇧ ) by
HX and let JX be the mapping for the filtration (F⇧ ). Since these mappings are defined
pathwise, it is easy to verify that if f 2 S(G⇧ ) and g, h 2 S(F⇧ ) are as in (5.9.3), then
R
HX (f ) = JX (g)1A + JX (h)1Ac (5.9.6)
We will prove that X is a weak-stochastic integrator for the filtration (G⇧ ). For this, let
e P(G⇧ )) decrease to 0 uniformly. Let an # 0 be such that |f n |  an . Then for each
f n 2 B(⌦,
D
n invoking Theorem 5.79 we choose g n , hn 2 S(F⇧ ) with |g n |  an , |hn |  an such that
f n = g n 1A + g n 1Ac .
As noted above this gives, for n 1
HX (f n ) = JX (g n )1A + JX (hn )1Ac . (5.9.7)
Since X is a semimartingale for the filtration (F⇧ ), it is a stochastic integrator. Thus,

ucp ucp ucp
JX (g n ) ! 0 and JX (hn ) ! 0 and then (5.9.7) implies HX (f n ) ! 0. Hence X is a
weak-stochastic integrator for the filtration (F⇧ ). Invoking Theorem 5.78, we conclude that
X is a semimartingale for the filtration (G⇧ ).
Remark 5.81. As noted in Theorem 4.11, when f is (F⇧ )-predictable bounded process,
R
HX (f ) = JX (f ) and thus the stochastic integral f dX is unambiguously defined.
Theorem 5.82. Let X be a stochastic integrator on (⌦, F, P) with a filtration (F⇧ ). Let
Q be a probability measure on (⌦, F) that is absolutely continuous w.r.t. P. Then X is a
stochastic integrator on (⌦, F, Q) and the stochastic integral under P is a version of the
integral under Q.
Proof. Let H be the completion of F under Q and let Ht be the -field obtained by adding
all Q-null sets in every Ht . It can be checked that a process f is (H⇧ )-predictable if and
only if f 1⌦0 is (G⇧ )-predictable. Let
e P(H⇧ )).
HX (f ) = JX (f 1⌦0 ) f 2 B(⌦,
It is easy to see that HX is the required extension of the integral of simple predictable
T
processes.
Remark 5.83. Suppose we start with a filtration (F̃⇧ ) that may not satisfy the condition that
each F̃t contains all null sets. Suppose X is a (F̃⇧ )-adapted process that satisfies (4.10.2) for
F
this filtration. Let Ft be the smallest -field containing F̃t and all the null sets. It is easy
to see that X continues to satisfy (4.10.2) w.r.t. the filtration (F⇧ ) and is thus a stochastic
integrator.
A
Exercise 5.84. Let X be a semimartingale for a filtration (F⇧ ) on (⌦, F, P). Let {Am :
m 1} be a partition of ⌦ with An 2 F for all n 1. For t 0 let
R
Gt = (Ft [ {Am : m 1}).

Show that
(i) For every (G⇧ )-predictable process f , there exists (F⇧ )-predictable processes f m such that
D
1
X
f= 1Am f m .
m=1
ucp
(ii) Suppose for each m 1, {Y m,n : n 1} are r.c.l.l. processes such that Y m,n ! Ym
as n ! 1. Let
1
X
Zn = 1Am Y m,n
m=1
and
1
X
Z= 1Am Y m .
m=1
5.9. Enlargement of Filtration 209
ucp
Then prove that Z n ! Z as n ! 1.
(iii) Show that X is a stochastic integrator for the filtration (G⇧ ).
T
F
A
R
D
Chapter 6
Pathwise Formula for the Stochastic Integral
6.1 Preliminaries
T
R
For a simple predictable process f , the stochastic integral f dX has been defined explicitly,
Rt
path by path. In other words, the path t 7! ( 0 f dX)(!) is a function of the paths
F
{fs (!) : 0  s  t} and {Xs (!) : 0  s  t} of the integrand f and integrator X. For
a general (bounded) predictable f the integral has been defined as limit in probability of
suitable approximations and it is not clear if we can obtain a pathwise version. In statistical
A
inference for stochastic process the estimate, in stochastic filtering theory the filter and in
stochastic control theory the control in most situations involves stochastic integral, where
the integrand and integrator are functionals of the observation path and to be meaningful,
R
the integral should also be a functional of the observation.

How much does the integral depend upon the underlying filtration or the underlying
probability measure? Can we get one fixed version of the integral when we have not one
but a family of probability measures {P↵ } such that X is a semimartingale under each P↵ .
D
If we have one probability measure Q such that each P↵ is absolutely continuous w.r.t.
Q and the underlying process X is a semimartingale under Q then the answer to the
question above is yes- simply take the integral defined under Q and that will agree with
the integral under P↵ for each ↵ by Remark 4.15.
When the family {P↵ } is countable family, such a Q can always be constructed. How-
ever, such a Q may not exist in general. Once concrete situation where such a situation
arises and has been considered in the literature is when we have a Markov Process- when
one considers the family of measures {Px : x 2 E}, where Px represents the distribution of
Markov Process conditioned on X0 = x. See [18]. In this context, Cinlar, Jacod, Protter
210
6.2. Pathwise Formula for the Stochastic Integral 211
and Sharp [9] showed the following : For processes S such that S is semimartingale under
Px for every x and for f in a suitable class of predictable processes, there exists a process
R
Z such that Z is a version of f dS under Px for every x.
In Bichteler [3], Karandikar [32], [33], [37] it was shown that for an r.c.l.l. adapted
process Z and a semimartingale X, suitably constructed Riemann sums converge almost
R
surely to the stochastic integral Z dX . This result was recast in [40] to obtain a universal
mapping : D([0, 1), R) ⇥ D([0, 1), R) 7! D([0, 1), R) such that if X is a semimartingale
and Z is an r.c.l.l. adapted process, then (Z, X) is a version of the stochastic integral
R
Z dX.
As in the previous chapter, we fix a filtration (F⇧ ) on a complete probability space
(⌦, F, P) and we assume that F0 contains all P-null sets in F.
First we will prove a simple result which enables us to go from L2 estimates to almost
T
sure convergence.
Lemma 6.1. Let V m be a sequence of r.c.l.l. process and ⌧k an increasing sequence of stop
times, increasing to 1 such that
1
X F
ksup |Vtm |k2 < 1.
m=1 t⌧k
(6.1.1)
A
Then we have
sup|Vtm | ! 0 8T < 1, a.s.
tT
R
Proof. The condition (6.1.1) implies

1
X
k sup |Vtm |k2 < 1
m=1 t⌧k
D
and hence for each k,

1
X
sup |Vtm | < 1 a.s.
m=1 t⌧k
Since ⌧k increase to 1, the required result follows.
6.2 Pathwise Formula for the Stochastic Integral

Recall that D([0, 1), R) denotes the space of r.c.l.l. functions on [0, 1) and that for ↵ 2
D([0, 1), R), ↵(t ) denotes the left limit at t (for t > 0) and ↵(0 ) = 0.
212 Chapter 6. Pathwise Formula for the Stochastic Integral
Fix ↵ 2 D([0, 1), R). For each n 1; let {tni (↵) : i 1} be defined inductively as
follows : tn0 (↵) = 0 and having defined tni (↵), let
tni+1 (↵) = inf{t > tni (↵) : |↵(t) ↵(tni (↵))| 2 n

or |↵(t ) ↵(tni (↵))| 2 n
}. (6.2.1)
Note that for each ↵ 2 D([0, 1), R) and for n 1, tni (↵) " 1 as i " 1 (if limi tni (↵) = t⇤ <
1, then the function ↵ cannot have a left limit at t⇤ ). For ↵, 2 D([0, 1), R) let
1
X
n (↵, )(t) = ↵(tni (↵) ^ t)( (tni+1 (↵) ^ t) (tni (↵) ^ t)). (6.2.2)
i=0
Since tni (↵) increases to infinity, for each ↵ and t fixed, the infinite sum appearing above
is essentially a finite sum and hence n (↵, ) is itself an r.c.l.l. function. We now define a
mapping : D([0, 1), R) ⇥ D([0, 1), R) 7! D([0, 1), R) as follows: Let D⇤ ✓ D([0, 1), R) ⇥
D([0, 1), R) be defined by
T
D⇤ = {(↵, ) : n (↵, ) converges in ucc topology}
and for ↵, 2 D([0, 1), R)

8
(↵, ) =
<lim
:0
n F
n (↵, ) if (↵, ) 2 D⇤
otherwise.
(6.2.3)
A
Note that the mapping has been defined without any reference to a probability measure
or a process. Here is the main result on Pathwise integration formula.
Theorem 6.2. Let X be a semimartingale on a probability space (⌦, F, P) with filtration

R
(F⇧ ) and let U be an r.c.l.l. adapted process. Let
Z· (!) = (U· (!), X· (!)) (6.2.4)

D
Then Z
Z= U dX. (6.2.5)
Proof. For each fixed n, define { n : i 0} inductively with n = 0 and

i 0
n n n n
i+1 = inf{t > i : |Ut U in | 2 or |Ut U in | 2 }
and is thus a stop time (for all n, i). Let us note that n = tni (U· (!)). Let Z·n (!) =
i (!)
n (U· (!), X· (!)). Then we can see that
1
X
Ztn = Ut^ jn (Xt^ n
j+1
Xt^ jn )
j=0
6.2. Pathwise Formula for the Stochastic Integral 213
R
and thus Z n = U n dX where
1
X
Utn = Ut^ jn 1( n n
j , j+1 ]
(t).
j=0
Since by definition of { n {U n }, we have
i },
|Utn Ut |  2 n
(6.2.6)
R
and hence Un! U in ucp. Then by Theorem 4.46, ! Z = U dX in the ucp Zn
metric.
The crux of the argument is to show that the convergence is indeed almost sure-
Z t Z t
n
sup| U dX U dX| ! 0 8T < 1 a.s. (6.2.7)
tT 0 0
Once this is shown, it would follow that (U· (!), X· (!)) 2 D⇤ a.s. and then by definition of
and Z we conclude that Zn = (U n , X) converges to (U, X) in ucc topology almost
T
surely. Since Z n ! Z in ucp, we have Z = (U, X) completing the proof.
Remains to prove (6.2.7). For this, first using Corollary 5.53, let us decompose X as
X = M + A, M 2 M2loc and A 2 V. Now using the fact that the dA integral is just the
Lebesgue - Stieltjes integral and the estimate (6.2.6) we get
Z t
| U dA
0
n
Z t
U dA| 
Z t
0
|Usn Us |d|A|t
F 0
A
n
2 |A|t .
and hence Z Z
t t
sup| U n dA U dA|  2 n
|A|T
R
tT 0 0 (6.2.8)
! 0.
Thus (6.2.7) would follow in view of linearity of the integral once we show
Z t Z t
D
n
[sup| U dM U dM | ] ! 0 8T < 1 a.s. (6.2.9)
tT 0 0
k]
Let ⌧k be stop times increasing to 1 such that ⌧k  k and M [⌧ is a square integrable
martingale so that
k k
E[ [M, M ]⌧k ] = E[ [M [⌧ ] , M [⌧ ] ]k ] < 1. (6.2.10)
Thus using the estimate (5.4.10) on the growth of the stochastic integral with respect to a
local martingale (Theorem 5.26), we get
Z t Z t Z ⌧k
E[sup | U n dM U dM |2 ]  4E[ |Usn Us |2 d[M, M ]s ]
t⌧k 0 0 0 (6.2.11)
2n
 4(2 )E[ [M, M ]⌧k ].
214 Chapter 6. Pathwise Formula for the Stochastic Integral
Rt Rt p
Thus, writing ⇠tn = 0 U n dM 0 U dM and ↵k = E[ [M, M ]⌧k ], we have
ksup |⇠tn |k2  2 n+1

↵k . (6.2.12)
t⌧k
Since ↵k < 1 as seen in (6.2.10), Lemma 6.1 implies that (6.2.9) is true completing the
proof.
R
Remark 6.3. This result implies that the integral U dX for an r.c.l.l. adapted process U
does not depend upon the underlying filtration or the probability measure or on the decom-
position of the semimartingale X into a (local) martingale and a process with finite variation
R·
paths. A path ! 7! 0 U dX(!) of the integral depends only on the paths ! 7! U· (!) of
the integrand and ! 7! X· (!) of the integrator. The same however cannot be said in general
R
about f dX if f is given to be a predictable process.
T
Remark 6.4. In Karandikar [37, 40] the same result was obtained with tni (↵) defined via
tni+1 (↵) = inf{t tni (↵) : |↵(t) ↵(tni (↵))| 2 n

}
F
instead of (6.2.1). The result is of course true, but requires the underlying -fields were required
to be right continuous and to prove that the resulting jn are stop times required deeper results
which we have avoided in this book.
A
6.3 Pathwise Formula for Quadratic Variation
R
In Section 5.2 we had obtained a pathwise formula for the quadratic variation process of
a locally square integrable martingale - namely (5.3.16). We now observe that the same
formula gives quadratic variation of local martingales as well - indeed of semimartingales.
D
We will need to use notations from Section 5.2 as well as Section 6.2
Theorem 6.5. Let be the mapping defined in Section 5.2 by (5.2.2). For a semimartin-
gale X, let
[X, X]t (!) = [ (X.(!))](t). (6.3.1)
Then [X, X] is a version of the quadratic variation [X, X] i.e.
P( [X, X]t = [X, X]t 8t) = 1.
Proof. For ↵ 2 D([0, 1), R) and for n 1, let {tni (↵) : i 1} be defined inductively
by ba8. Recall the definition (5.2.1) of n (↵) and (6.2.2) of n . Using the identity
6.3. Pathwise Formula for Quadratic Variation 215
(b a)2 = b2 a2 2a(b a) with b = ↵(tni+1 (↵) ^ t) and a = ↵(tni (↵) ^ t) and summing
over i 2 {0, 1, 2 . . .}, we get the identity
n (↵) = (↵(t))2 (↵(0))2 2 n (↵). (6.3.2)
Let e be as defined in Section 5.2 and

,D , D⇤ be as defined in Section 6.2. Let
b = {↵ 2 D : (↵, ↵) 2 D⇤ }.
D
Then using (6.3.2) along with the definition (6.2.3) of , it follows that
b✓D
D e
and
(↵) = (↵(t))2 (↵(0))2 b
2 (↵) ↵ 2 D. (6.3.3)
As noted in Section 6.2, (X· (!), X· (!)) 2 D⇤ and
T
Z
X dX = (X, X) (6.3.4)
From aiy40s, (6.3.3) and (6.3.4) and it follows that
[X, X]t = Xt2 F

X02 2
Z
0
t
X dX. (6.3.5)
A
This along with (4.6.1) implies [X, X]t = [X, X]t completing the proof.
R
D
Chapter 7
Continuous Semimartingales
In this chapter we will consider continuous semimartingales and show that stochastic dif-
T
ferential equations driven by these can be analyzed essentially using the same techniques
as in the case of SDE driven by Brownian motion. This can be done using random time
change. The use of random time change in study of solutions to stochastic di↵erential
equations was introduced in [32], [33].
F
We introduce random time change and we then obtain a growth estimate on f dX
R
where X is a continuous semimartingale and f is a predictable process. Then we observe

R
A
that if a semimartingale satisfies a condition (7.2.2), then the growth estimate on f dX
R
is very similar to the growth estimate on f d , where is a brownian motion. We
also note that by changing time via a suitable random time, any semimartingale can be
transformed to a semimartingale satisfying (7.2.2). Thus, without loss of generality we
R
can assume that the driving semimartingale satisfies (7.2.2) and then use techniques used
for Brownian motion case. We thus show that stochastic di↵erential equation driven by
continuous semimartingales admit a solution when the coefficients are Lipschitz functions.
D
We also show that in this case, one can get a pathwise formula for the solution, like the
formula for the integral obtained in the previous chapter.
7.1 Random Time Change

Change of variable plays an important role in calculations involving integrals of functions
of a real variable. As an example, let G be a continuous increasing function with G[0] = 0.
Let us look at the formula Z t
f (G(t)) = f (0) + f 0 (G(s))dG(s). (7.1.1)
0
216
7.1. Random Time Change 217
which was derived in section 4.8. We had seen that when G is absolutely continuous, this
formula follows by the chain rule for derivatives. Let a : [0, 1) 7! [0, 1) be a continuous
strictly increasing one-one onto function. Let us write G̃(s) = G(a(s)). It can be seen that
(7.1.1) can equivalently be written as
Z t
f (G̃(t)) = f (0) + f 0 (G̃(s))dG̃(s). (7.1.2)
0
Exercise 7.1. Show that (7.1.1) holds if and only if (7.1.2) is true.
So to prove (7.1.1), suffices to prove (7.1.2) for a suitable choice of a(t). Let
a(s) = inf{t 0 : (t + G(t)) s}.
For this choice of a it can be seen that G̃ is a continuous increasing function and that for
0  u  v < 1, G̃(v) G̃(u)  v u so that G̃ is absolutely continuous and thus (7.1.2)
follows from chain rule.
T
When working with continuous semimartingales, the same idea yields interesting results-
of course, the time change t 7! a(t) has to be replaced by t 7! t , where t is a stop time.
F
Definition 7.2. A (F⇧ )-random time change = ( t ) is a family of (F⇧ )- stop times { t :
0  t < 1} such that for all ! 2 ⌦, t 7! t (!) is a continuos strictly increasing function from
[0, 1) onto [0, 1).
A
Example 7.3. Let A be a (F⇧ )-adapted continuous increasing process with A0 = 0. Then
s = inf{t 0 : (t + At ) s}
can be seen to be a (F⇧ )-random time change.
R
Example 7.4. Let B be a (F⇧ )-adapted continuous increasing process with B0 = 0 such that
B is strictly increasing and limt!1 Bt = 1 a.s.. Then
D
s = inf{t 0 : Bt s}
can be seen to be a (F⇧ )-random time change.
Recall the Definition 2.35 of the stopped -field. Given a (F⇧ )-random time change
= ( t ), we define a new filtration (G⇧ ) = (Gt ) as follows:
Gt = F t , 0  t < 1. (7.1.3)
Clearly, for s  t, we have s  t and hence Gs ✓ Gt and so {Gs } is a filtration. Further,
G0 = F0 . We will denote the filtration (G⇧ ) defined by (7.1.3) as ( F⇧ ). Given a process f ,
we define the process g = [f ] via
gs = f s 0  s < 1. (7.1.4)
218 Chapter 7. Continuous Semimartingales
The map f ! g is linear and preserves limits: if f n converges to f pointwise or in ucp then
so does the sequence g n . We also define = { t : 0  t < 1} via
t = inf{s 0 : s t} (7.1.5)
and denote by [ ] 1. Here is the reverse time change.
Exercise 7.5. Show that if u (!) = v then v (!) = u.
Given a (F⇧ )- stop time ⌧ , we define = [⌧ ] by
= [ ]⌧ 1 = ⌧. (7.1.6)
Note the appearance of [ ] 1 in the definition above. It is not difficult to see that
= ⌧.
T
Recall the definition (4.4.12) of X [⌧ ] , the process X stopped at ⌧ . For Y = [X], note that
[⌧ ]
( [X [⌧ ] ])s = X s
=X s ^⌧ =X s^ =X s^ = Ys^ = Ys[ ]
and thus we have.

Y[ ]
F
= X [⌧ ] .
We will now prove few relations about random time change and its interplay with
(7.1.7)
A
notions discussed in the earlier chapters such as stop times, predictable processes, local
martingales, semimartingales and stochastic integrals.
Theorem 7.6. = ( t ) be a (F⇧ )- random time change. Let = [ ] 1 be defined via

R
(7.1.5). Then we have
(i) =( s) is a (G⇧ )- random time change.

D
(ii) Let ⌧ be a (F⇧ )-stop time. Then = [⌧ ] = ⌧ is a (G⇧ )-stop time.
(iii) Let U be a (F⇧ ) adapted r.c.l.l. process. Then V = [U ] is a (G⇧ ) adapted r.c.l.l.
process.
(iv) Let f be a (F⇧ ) bounded predictable process. Then g = [f ] is a (G⇧ ) bounded pre-
dictable process. If f is a (F⇧ ) locally bounded predictable process then g = [f ] is a
(G⇧ ) locally bounded predictable process.
(v) Let A be a (F⇧ ) adapted r.c.l.l. process with finite variation paths. Then B = [A] is
a (G⇧ ) adapted r.c.l.l. process with finite variation paths.
7.1. Random Time Change 219
(vi) Let M be a (F⇧ ) local martingale. Then N = [M ] is a (G⇧ ) local martingale.
(vii) Let X be a (F⇧ ) semimartingale. Then Y = [X] is a (G⇧ ) semimartingale.

R R
(viii) Let Z = f dX. Then [Z] = gdY (where f, g, X, Y are as in (iv) and (vii) ).
(ix) [Y, Y ] = [ [X, X] ], where X, Y are as in (vii).

ucp
(x) Let X n , X be (F⇧ ) adapted r.c.l.l. processes such that X n ! X. Then Y n =
ucp
[X n ] ! Y = [X].
Proof. Note that by Corollary 2.50, is (G⇧ ) adapted. For any a, t 2 [0, 1), note that
{ a  t} = {a  t }.
Since t is F t = Gt measurable, it follows that { a  t} 2 Gt and hence a is a (G⇧ ) - stop
T
time. Since s 7! s is continuous strictly increasing function from [0, 1) onto itself, same
is true of s 7! s and hence = ( s ) is a random time change. This proves (i).
Now, for s 2 [0, 1)
Thus is a (G⇧ ) - stop time.

{  s} = {⌧ 
F s} 2F s = Gs .
A
For (iii) since X is r.c.l.l., (F⇧ ) adapted and s is a (F⇧ ) - stop time, using Lemma 2.36,
we conclude that Ys = X s is Gs = F s measurable. Thus Y is (G⇧ ) adapted and is clearly
r.c.l.l.
For (iv) the class of bounded processes f such that g = [f ] is (G⇧ )-predictable is
R
bp-closed and by the part proved already, it contains bounded continuous (F⇧ ) adapted
processes and thus also contains bounded (F⇧ )-predictable processes. Now if f is (F⇧ )-
predictable and locally bounded, let ⌧ n be sequence of stop times, ⌧ n " 1 such that
D
n
fn = f [⌧ ] is bounded predictable. Then as shown above, [fn ] is also bounded predictable.
Let n = [⌧ n ]. As seen in (7.1.7),
n] n
g[ = [f [⌧ ] ] = [fn ]
n
and thus g [ ] is predictable. Now ⌧ n " 1 implies n " 1 and thus g is locally bounded
(G⇧ )-predictable process. This proves (iv).
For (v), we have already noted that B is (G⇧ ) adapted. And clearly,
Var[0,s] (B(!)) = Var[0, s (!)] (A(!))
and hence paths of B have finite variation.

For (vi), in order to prove that N is a (G⇧ ) local martingale, we will obtain a sequence
n of (G⇧ ) stop times increasing to 1 such that for all (G⇧ )- stop times ⇣,
E[N n ^⇣ ] = E[N0 ].
This will prove N [ n ] is a martingale and hence that N is a local martingale. Since M is a
local martingale, let ⌧ñ be stop times such M [⌧ñ ] is a martingale for each n where ⌧ñ " 1.
Let
⌧n = ⌧ñ ^ n ^ n .
Then ⌧n  ⌧ñ and ⌧n " 1. Then M [⌧n ] is a martingale for each n and hence for all stop
times ⌘ one has
E[M⌧n ^⌘ ] = E[M0 ]. (7.1.8)
Now let n = [⌧n ] = ⌧n . Since ⌧n  n, it follows that n  = n. Now for any
T
n
(G⇧ )-stop time ⇣, we will show

E[N n ^⇣ ] = E[N0 ]. (7.1.9)
Let ⌘ = [⇣] = ⇣. Then by part (ii) above, ⌘ is a (F⇧ )-stop time. Note that
N n ^⇣
F
= M⌧n ^⌘ .
Further, M0 = N0 and thus (7.1.8) and (7.1.10) together imply (7.1.9) proving (vi).
(7.1.10)
A
Part (vii) follows from (v) and (vi) by decomposing the semimartingale X into a local
martingale M and a process with finite variation paths A : X = M + A. Then [X] =
Y = [M ] + [A] = N + B.
R
We can verify the validity of (viii) when f is a simple predictable process and then
easy to see that the class of processes for which (viii) is true is bp-closed and thus contains
all bounded predictable processes. We can then get the general case (of f being locally
D
bounded) by localization.
For (ix), note that
Z t
2 2
[X, X] = Xt X0 2 X dX.
0
Changing time in this equation, and using (viii), we get
Z t
2 2
[[X, X]]t =X t X0 2 X dX
0
Z t
2 2
=Yt Y0 2 Y dY
0
=[Y, Y ].
7.2. Growth estimate 221
For the last part, note that for T < 1, T0 < 1, > 0 one has (using Ys = X s )
P( sup |Ysn Ys | )  P( sup |Xsn Xs | ) + P( T T0 )

0tT 0tT0
Now given T < 1, > 0 and ✏ > 0, first get T0 such that P( T T0 ) < 2✏ and then for this
ucp
T0 , using X n ! X get n0 such that for n n0 one has P(sup0tT0 |Xsn Xs | ) < 2✏ .
Now, for n n0 we have
P( sup |Ysn Ys | ) < ✏.
0tT
Remark 2.67 now completes the proof.
Remark 7.7. It should be noted that if M is a martingale then N = [M ] may not be a

(G⇧ )-martingale. In fact, Nt may not be integrable as seen in the next exercise.
T
Exercise 7.8. Let W be a Brownian motion and ⇠ be a (0, 1)-valued random variable
independent of W such that E[⇠] = 1. Let Ft = (⇠, Ws : 0  s  t). Let t = t⇠. Show
that
(i)
(ii)
t is a stop time for each t.
= ( t ) is a random time change.

F
A
(iii) E[|Zt |] = 1 for all t > 0 where Z = [W ].
(iv) Z is a local martingale but not a martingale.

R
7.2 Growth estimate

D
Let X be a continuous semimartingale and let X = M + A be the decomposition of X with

M being a continuous local martingale, A being a process with finite variation paths. We
will call this as the canonical decomposition. Recall that the quadratic variation [M, M ] is
itself a continuous process and |A|t = Var[0,t] (A) is also a continuous process. For a locally
bounded predictable process f , for any stop time such that the right hand side in (7.2.1)
below is finite one has
Z s
E[ sup | f dX|2 ]
0s 0+
Z Z (7.2.1)
2 2
 8E[ |fs | d[M, M ]s ] + 2E[( |fs |d|A|s ) ].
0+ 0+
R R R
To see this, we note f dX = f dM + f dA and for the dM integral we use Theorem
R R
5.26 and for the dA integral we use | f dA|  |f |d|A|.
For process A, B 2 V+ (increasing adapted processes), we define A << B if Ct = Bt At
is an increasing process. The following observation will be used repeatedly in the rest of
this chapter: if A << B, then for all f
Z t Z t
| fs dAs |  |fs |dBs .
0+ 0+
We introduce a notion of a amenable semimartingale and obtain a growth estimate on
integrals w.r.t. a amenable semimartingale which is similar to the one for Brownian motion.
Definition 7.9. A continuous semimartingale Y is said to be a amenable semimartingale if

the canonical decomposition Y = N + B satisfies, for 0  s  t < 1
T
[N, N ]t [N, N ]s  (t s), |B|t |B|s  (t s). (7.2.2)
Theorem 7.10. Suppose Y is a continuous amenable semimartingale. Then for any locally
bounded predictable f , and a stop time , one has
E[ sup |
0s ^T
Z s
0+
F
f dX|2 ]  2(4 + T )E[
Z ^T
|fs |2 ds].
0+
(7.2.3)
A
Proof. The condition (7.2.2) implies that t [N, N ]t and t |B|t are increasing processes.
This observation along with (7.2.1) yields
Z s Z ^T Z ^T
2 2
E[ sup | f dX| ]  8E[ |fs | ds] + 2(E[ |fs |ds])2 .
R
0s ^T 0+ 0+ 0+
Now the required estimate follows by the Cauchy-Schwarz inequality:

Z ^T Z ^T
2
(E[ |fs |ds])  T E[ |fs |2 ds].
D
0+ 0+
Remark 7.11. The condition (7.2.2) can be equivalently stated as
s [N, N ]s  t [N, N ]t , s |B|s  t |B|t for 0  s  t < 1 (7.2.4)
or, writing It = t, it is same as
[N, N ] << I, |B| << I. (7.2.5)

R
Remark 7.12. We see that for a amenable semimartingale X, the stochastic integral f dX
satisfies a growth estimate similar to the one when X is a Brownian motion. Thus, results such
7.2. Growth estimate 223
as existence, uniqueness, approximation of solution to an SDE driven by a Brownian motion

continue to hold for a amenable semimartingale X. We will come back to this later in this
chapter.
Remark 7.13. In the definition of amenable semimartingale, instead of (7.2.2) we could have
required that for some constant K < 1
[N, N ]t [N, N ]s  K(t s), |B|t |B|s  K(t s). (7.2.6)
The only di↵erence is that a constant K 2 would appear in the estimate (7.2.3)
Z s Z ^T
E[ sup | f dX|2 ]  2(4 + T )K 2 E[ |fs |2 ds]. (7.2.7)
0s ^T 0+ 0+
A simple but important observation is that given a continuous semimartingale X one

can get a random time change = ( · ) such that the semimartingale Y = [X] satisfies
T
(7.2.2). Indeed, given finitely many semimartingales, we can choose one random time
change that does it as we see in the next result.
Theorem 7.14. Let X 1 , X 2 , . . . , X m be continuous semimartingales, 1  j  m with

F
respect to the filtration (F⇧ ). Then there exists a random time change = ( t ) (with respect
to the filtration (F⇧ )) such that for 1  j  m, Y j = [X j ] is a amenable semimartingale.
A
Proof. For 1  j  m, let X j = M j + Aj be the canonical decomposition of the semi-
martingale X j with M j being a continuous local martingale, M0j = 0 and Aj are continuous
processes with finite variation paths. Define an increasing process V by
R
Xm
Vt = t + ([M j , M j ]t + |Aj |t ).
j=1
Then V is strictly increasing adapted process with V0 = 0. Now defining

D
t = inf{s 0 : Vs t}
it follows that = ( t ) is a random time change. As noted earlier, Y j = [X j ] is a
semimartingale with canonical decomposition Y j = N j + B j where N j = [M j ], B j =
[Aj ]. Further, observing that for 1  j  m, 0  s  t < 1,
[N j , N j ]t [N j , N j ]s = [M j , M j ] t [M j , M j ] s V t V s =t s
and
|B j |t |B j |s = |Aj | t |Aj | s V t V s =t s,
it follows that this random time change satisfies the required condition.

Let us consider the Stochastic Di↵erential Equation (3.5.1) where instead of a Brownian
motion as in Chapter 3, here W = (W 1 , W 2 , . . . , W d ) is a amenable semimartingale. The
growth estimate (7.2.3) enables one to conclude that in this case too, Theorem 3.26 is
true and the same proof works essentially- using (7.2.3) instead of (3.4.4). Moreover,
using random time change, one can conclude that the same is true even when W is any
continuous semimartingale. We will prove this along with some results on approximations
to the solution of an SDE.
We are going to consider the following general framework for the SDE driven by con-
tinuous semimartingales, where the evolution from a time t0 onwards could depend upon
the entire past history of the solution rather than only on its current value as was the case
in equation (3.5.1) driven by a Brownian motion.
T
Let Y 1 , Y 2 , . . . Y m be continuous semimartingales w.r.t. the filtration (F⇧ ). Here we
will consider an SDE
dUt = b(t, ·, U )dYt , t 0, U0 = ⇠0 (7.3.1)
F
where the functional b is given as follows. Recall that Cd = C([0, 1), Rd ). Let
a : [0, 1) ⇥ ⌦ ⇥ Cd ! L(d, m) (7.3.2)

A
be such that for all ⇣ 2 Cd ,
(t, !) 7! a(t, !, ⇣) is an r.c.l.l. (F⇧ ) adapted process (7.3.3)

R
and there is an increasing r.c.l.l. adapted process K such that for all ⇣1 , ⇣2 2 Cd ,
sup ka(s, !, ⇣2 ) a(s, !, ⇣1 )k  Kt (!) sup |⇣2 (s) ⇣1 (s)| (7.3.4)

0st 0st
D
and b : [0, 1) ⇥ ⌦ ⇥ Cd ! L(d, m) be given by
b(s, !, ⇣) = a(s , !, ⇣). (7.3.5)
Lemma 7.15. Suppose the functional a satisfies (7.3.2)-(7.3.4).
(i) For all t 0,

(!, ⇣) 7! a(t, !, ⇣) is Ft ⌦ B(Cd ) measurable. (7.3.6)
(ii) For any continuous (F⇧ ) adapted process V , Z defined by Zt = a(t, ·, V ) ( i.e. Zt (!) =
a(t, !, V (!)) ) is an r.c.l.l. (F⇧ ) adapted process.
(iii) For any stop time ⌧ ,

(!, ⇣) 7! a(⌧ (!), !, ⇣) is F⌧ ⌦ B(Cd ) measurable. (7.3.7)
Proof. Since for fixed t, ⇣, the mapping ! 7! a(t, !, ⇣) is Ft measurable and in view of
(7.3.4), ⇣ 7! a(t, !, ⇣) is continuous for fixed t, !, it follows that (7.3.6) is true since Cd is
separable.
For part (ii), let us define a process V t by Vst = Vs^t . In view of assumption (7.3.3), Z
is an r.c.l.l. process.The fact that ! 7! V t (!) is Ft measurable along with (7.3.6) implies
that Zt = a(t, ·, V t ) is Ft measurable.
For part (iii), when ⌧ is a simple stop time, (7.3.7) follows from (7.3.6). For a general
bounded stop time ⌧ , the conclusion (7.3.7) follows by approximating ⌧ from above by
simple stop times and using right continuity of a(t, !, ⇣). For a general stop time ⌧ , (7.3.7)
follows by approximating ⌧ by ⌧ ^ n.
T
Let b(t, !, ⇣) = a(t , !, ⇣). Let 0 denote the process that is identically equal to zero.
Since (t, !) 7! b(t, !, 0) is an r.c.l.l. adapted process, using hypothesis (7.3.4), it follows
that for ⇣ 2 Cd
where
0st
F
sup ka(t, !, ⇣)k  Kt0 (!)(1 + sup |⇣(s)|)
0st
(7.3.8)
A
Kt0 (!) = Kt (!) + sup ka(t, !, 0)k. (7.3.9)
0st
Kt0 is clearly an r.c.l.l. adapted process.

R
Here too, as in the Brownian motion case, a continuous (Rd -valued) adapted process U
is said to be a solution to the equation (7.3.1) if
Z t
U t = ⇠0 + b(s, ·, U )dYs (7.3.10)
D
0+
i.e. for 1  j  d,
m Z
X t
Utj = ⇠0j + bjk (s, ·, U )dYsk
k=1 0+
where U = (U 1 , . . . , U d ) and b = (bjk ).

It is convenient to introduce matrix and vector-valued processes and stochastic integral
R
f dX where f is matrix-valued and X is vector-valued. All our vectors are column vectors,
though we will write it as c = (c1 , c2 , . . . , cm ).
Let X 1 , X 2 , . . . X m be continuous semimartingales w.r.t. the filtration (F⇧ ). We will
say that X = (X 1 , X 2 , . . . X m ) is an Rd -valued semimartingale. Similarly, for 1  j  d,
1  k  m let fjk be locally bounded predictable process. f = (fjk ) will be called an

R
L(d, m)-valued locally bounded predictable process. The stochastic integral Y = f dX is
defined as follows: Y = (Y 1 , Y 2 , . . . , Y d ) where
Xm Z
j
Y = fjk dX k .
k=1
Let us recast the growth estimate in matrix-vector form:
Theorem 7.16. Let X = (X 1 , X 2 , . . . X m ), where X j is a amenable semimartingale for

each j, 1  j  m. Then for any locally bounded L(d, m)-valued predictable f , and a stop
time , one has
Z s Z ^T
2
E[ sup | f dX| ]  2m(4 + T )E[ kfs k2 ds ]. (7.3.11)
0s ^T 0+ 0+
T
Proof.
Z s
E[ sup | f dX|2 ]
0s ^T 0+

d
X
j=1
E[ sup |
F
0s ^T k=1
m Z
X
0+
s
fjk dX k |2 ]
A
d X
X m Z s
m E[ sup | fjk dX k |2 ]
j=1 k=1 0s ^T 0+
d X
X m Z ^T
R
 m(8 + 2T ) E[ |fjk (s)|2 ds]

j=1 k=1 0+
Z ^T
= 2m(4 + T )E[ kfs k2 ds].
D
0+
In the second inequality above we have used the estimate (7.2.3).
We will prove existence and uniqueness of solution of (7.3.1). When the driving semi-
martingale satisfies (7.2.2), the proof is almost the same as the proof when the driving
semimartingale is a Brownian Motion. We will prove this result without making any in-
tegrability assumptions on the initial condition ⇠0 and the uniqueness assertion is without
any moment condition. For this the following simple observation is important.
Remark 7.17. Suppose M is a square integrable martingale w.r.t. a filtration (F⇧ ) and let
⌦0 2 F0 . Then Nt = 1⌦0 Mt is also a square integrable martingale and further [N, N ]t =
1⌦0 [M, M ]t . Thus, the estimate (5.3.22) can be recast as

E[1⌦0 sup |Ms |2 ]  4E[ 1⌦0 [M, M ]T ].
0sT
Using this we can refine the estimate (7.2.3): For a amenable semimartingale X, any locally
bounded predictable f , a stop time and ⌦0 2 F0 , one has
Z s Z ^T
2
E[1⌦0 sup | f dX| ]  2(4 + T )E[1⌦0 |fs |2 ds]. (7.3.12)
0s ^T 0+ 0+
here is the modified estimate for vector-valued case, a modification of (7.3.11): if X =
(X 1 , X 2 , . . . X m ) where each X j is a amenable semimartingale and f = (fjk ) is an L(d, m)-
valued locally bounded predictable process, then
Z s Z ^T
2
E[1⌦0 sup | f dX| ]  2m(4 + T )E[1⌦0 kfs k2 ds]. (7.3.13)
0s ^T 0+ 0+
T
We will first prove uniqueness of solution in the special case when the driving semi-
martingale is a amenable semimartingale.
Theorem 7.18. Let Y = (Y 1 , Y 2 , . . . Y m ) where Y j is a amenable continuous semimartin-
F
gale for each j. Let the functional a satisfy conditions (7.3.2)- (7.3.4) and b be defined by
(7.3.5). Let ⇠0 be any F0 measurable random variable. Then if U, Ũ are (F⇧ ) adapted
continuous process satisfying
A
Z t
U t = ⇠0 + b(s, ·, U )dYs , (7.3.14)
0+
Z t
Ũt = ⇠0 + b(s, ·, Ũ )dYs . (7.3.15)
R
0+
then
P(Ut = Ũt 8t 0) = 1. (7.3.16)
D
Proof. For i 1, let ⌧i = inf{t 0 : Kt0 (!) i or Kt0 (!) i} ^ i where Kt0 (!) is
the r.c.l.l. adapted process given by (7.3.9). Thus each ⌧i is a stop time, ⌧i " 1 and for
0  t < ⌧i (!), we have
0  Kt (!)  Kt0 (!)  i.
Recalling that b(t, ·, ⇣) = a(t , ·, ⇣), we conclude that for ⇣, ⇣1 , ⇣2 2 Cd
sup kb(s, !, ⇣2 ) b(s, !, ⇣1 )k  i sup |⇣2 (s) ⇣1 (s)|. (7.3.17)
0s(t^⌧i (!)) 0s(t^⌧i (!))
and
sup kb(s, !, ⇣)k  i(1 + sup |⇣(s)|). (7.3.18)
0s(t^⌧i (!)) 0s(t^⌧i (!))
We first show that if V is any solution to (7.3.14), i.e. V satisfies

Z t
Vt = ⇠ 0 + b(s, ·, V )dYs (7.3.19)
0+
then for k 1, i 1,
E[1{|⇠0 |k} sup |Vt |2 ] < 1. (7.3.20)
0t⌧i
Let us fix k, i for now. For j 1, let j = inf{t 0 : |Vt | j}. Since V is a continuous
adapted process with V0 = ⇠0 , it follows that j is a stop time, limj!1 j = 1 and
sup |Vt |2  max(|⇠0 |2 , j 2 ). (7.3.21)

0t(u^⌧i ^ j)
Thus using the estimate (7.3.12) along with (7.3.18), we get for, i, j, k 1
E[1{|⇠0 |k} sup |Vt |2 ]
T
0t(u^⌧i ^ j)
Z (u^⌧i ^ j)
2
 2[E[1{|⇠0 |k} (|⇠0 | + 2m(4 + i) kb(s, ·, Vs )k2 ds)]]
0+
Z (u^⌧i ^
Writing
 E[1{|⇠0 |k} (2k 2 + 8m(4 + i)i2
F 0+
j)
(1 + sup
0t(s^⌧i ^ j)
|Vs |2 )ds)].
A
j (u) = E[1{|⇠0 |k} sup |Vt |2 ],
0t(u^⌧i ^ j)
it follows that for 0  u  T ,

Z u
R
2 3 2
j (u)  [2E[1{|⇠0 |k} |⇠0 | ] + 8m(4 + i)i + 8m(4 + i)i j (s)ds]
0+
and further, (7.3.21) yields that j is a bounded function. Thus, using (Gronwall’s) Lemma
3.23, we conclude
D
j (u)  [8m(4 + i)i3 + 2k 2 ] exp{8m(4 + i)i2 u}, 0  u  i.
Now letting j increase to 1 we conclude that (7.3.20) is true.

Returning to the proof of (7.3.16), since U, Ũ both satisfy (7.3.15), both also satisfy
(7.3.20) and hence we conclude
E[1{|⇠0 |k} sup |Ut Ũt |2 ] < 1. (7.3.22)

0t⌧i
Now Z t
Ut Ũt = (b(s, ·, U ) b(s, ·, Ũ ))dYs
0+
and hence using the Lipschitz condition (7.3.17) and the growth estimate (7.3.13), we
conclude that for 0  t  T ,
Z (t^⌧i )
E[1{|⇠0 |k} sup |Us Ũs |2 ]  2m(4 + i)i2 E[ 1{|⇠0 |k} sup |Us Ũs |2 ]du
0s(t^⌧i ) 0+ 0su
and hence the function defined by

(t) = E[1{|⇠0 |k} sup |Us Ũs |2 ]
0s(t^⌧i )
satisfies, for a suitable constant Ci
Z t
(t)  Ci (u)du, t 0.
0+
As noted above (see (7.3.22)) (t) < 1 for all t. Now (Gronwall’s) Lemma 3.23 implies
that (t) = 0 for all t. Thus we conclude
T
P({|⇠0 |  k} \ { sup |Us Ũs | ✏}) = 0
0s(t^⌧i )
for all ✏ > 0, i 1 and k 1. Since ⌧i " 1, this proves (7.3.16) completing the proof.
F
We have thus seen that if the Y is a amenable semimartingale then uniqueness of
solution holds for the SDE (7.3.14) and the proof is on the lines of the proof in the case
of Brownian motion. One big di↵erence is that uniqueness is proven without a priori
A
requiring the solution to satisfy a moment condition. This is important as while the
stochastic integral is invariant under time change, moment conditions are not. And this
is what enables us to prove uniqueness when the driving semimartingale may not be a
R
amenable semimartingale.
Using random time change we extend the result on uniqueness of solutions to the SDE
(7.3.14) to the case when the driving semimartingale may not be a amenable semimartin-
gale.
D
Theorem 7.19. Let X = (X 1 , X 2 , . . . X m ) where each X j is a continuous semimartingale.

Let the functional a satisfy conditions (7.3.2) - (7.3.4) and b be defined by (7.3.5). Let ⇠0 be
any F0 measurable random variable. If V, Ṽ are (F⇧ ) adapted continuous process satisfying
Z t
Vt = ⇠0 + b(s, ·, V )dXs , (7.3.23)
0+
Z t
Ṽt = ⇠0 + b(s, ·, Ṽ )dXs . (7.3.24)
0+
Then
P(Vt = Ṽt 8t 0) = 1. (7.3.25)
Proof. Let be a (F⇧ ) random time change such that Y j = [X j ], 1  j  m are

amenable semimartingales (such a random time change exists as seen in Theorem 7.14).
Let (G⇧ ) = ( F⇧ ), = [ ] 1 be defined via (7.1.5).
We define c(t, !, ⇣), d(t, !, ⇣) as follows: Fix ! and let ✓! (⇣) be defined by
✓! (⇣) = ⇣( s (!)) (7.3.26)
and let c(t, !, ⇣) = a( t (!), !, ✓! (⇣)), d(t, !, ⇣) = b( t (!), !, ✓! (⇣)). Since is continuous,
d(t, !, ⇣) = d(t , !, ⇣).
We will first observe that for all ⇣1 , ⇣2 2 Cd ,
sup kc(u, !, ⇣2 ) c(u, !, ⇣1 )k
0us
= sup ka( u (!), !, ✓! (⇣1 )) a( u (!), !, ✓! (⇣2 ))k

0us
T
 K s (!) sup |✓! (⇣1 )(v) ✓! (⇣2 )(v)| (7.3.27)
0v s (!)
 K s (!) sup |⇣2 ( v (!)) ⇣1 ( v (!))|

0v s (!)
We now prove that for each ⇣,

 K s (!) sup |⇣2 (u)
0us F ⇣1 (u)|.
A
(t, !) 7! c(t, !, ⇣) is an r.c.l.l. (G⇧ ) adapted process. (7.3.28)
That the mapping is r.c.l.l. follows since a is r.c.l.l. and t is continuous strictly increasing
function. To see that it is adapted, fix t and let ⇣ t be defined by ⇣ t (s) = ⇣(s ^ t). In view
R
of (7.3.27), it follows that

c(t, !, ⇣) = c(t, !, ⇣ t ) = a( t (!), !, ✓! (⇣ t )). (7.3.29)
Now
D
✓! (⇣ t ) = ⇣ t ( s (!)) = ⇣( s (!) ^ t).

Since s is a (G⇧ )-stop time, it follows that ! 7! ✓! (⇣ t ) is Gt = F t measurable. Since t
is a (F⇧ )-stop time, part (iii) in Lemma 7.15 gives that ! 7! a( t (!), !, ⇣) is F t ⌦ B(Cd )
measurable. From this we get
! 7! a( t (!), !, ✓! (⇣ t )) is Gt measurable. (7.3.30)
The relation (7.3.28) follows from (7.3.29) and (7.3.30). Let H = [K]. Then H is an (G⇧ )
adapted increasing process and (7.3.27) can be rewritten as
sup kc(u, !, ⇣2 ) c(u, !, ⇣1 )k  Hs (!) sup |⇣2 (u) ⇣1 (u)|. (7.3.31)
0as 0us
Let U = [V ], Ũ = [Ṽ ]. Then recall V = [U ], Ṽ = [Ũ ]. Let A, Ã be defined by

As = b(s, ·, V ) and Ãs = b(s, ·, Ṽ ). Then
Bs = A s
= b( s , ·, [U ])
= d(s, ·, U )
and likewise B̃t = d(t, Ũ ).

Thus the processes U, Ũ satisfy
Z t
Ut = ⇠ + d(s, U )dỸs ,
0+
Z t
Ũt = ⇠ + d(s, Ũ )dỸs .
0+
T
Since c, d satisfy (7.3.2)-(7.3.5), Theorem 7.18 implies
P(Ut = Ũt 8t 0) = 1
which in turn also proves (7.3.25) since V = [U ] and Ṽ = [Ũ ].

F
We are now ready to prove the main result on existence of solution to an SDE driven by
A
continuous semimartingales. Our existence result is a modification of Picard’s successive
approximation method. Here the approximations are explicitly constructed.
Theorem 7.20. Let X 1 , X 2 , . . . X m be continuous semimartingales. Let the functional a

R
satisfy conditions (7.3.2)-(7.3.4) and b be defined by (7.3.5). Let ⇠ be any F0 measurable

random variable. Then there exists a (F⇧ ) adapted continuous process V that satisfies
Z t
D
Vt = ⇠ 0 + b(s, ·, V )dXs . (7.3.32)

0+
Proof. We will construct approximations V (n) that converge to a solution of (7.3.32).

(0)
Let Vt = ⇠0 . The processes V (n) are defined by induction on n. Assuming that
V (0) , . . . , V (n 1) have been defined, we now define V (n) : Fix n.
(n) (n) (n)
Let ⌧0 = 0 and let {⌧j : j 1} be defined inductively as follows: if ⌧j = 1 then
(n) (n)
⌧j+1 = 1 and if ⌧j < 1 then
(n) (n) (n)
⌧j+1 = inf{s > ⌧j : ka(s, ·, V (n 1)
) a(⌧j , ·, V (n 1)
)k 2 n
(n)
(7.3.33)
or ka(s , ·, V (n 1)
) a(⌧j , ·, V (n 1)
)k 2 n
}.
(n)
Since the process s 7! a(s, ·, V (n 1) ) is an adapted r.c.l.l. process, it follows that each ⌧j
(n) (n) (n) (n)
is a stop time and limj"1 ⌧j = 1. Let V0 = ⇠0 and for j 0, ⌧j < t  ⌧j+1 let
(n) (n) (n)
Vt =V (n) + a(⌧j , ·, V (n 1)
)(Xt X⌧ (n) ).
⌧j j
Equivalently,
1
X
(n) (n)
Vt = ⇠0 + a(⌧j , ·, V (n 1)
)(Xt^⌧ (n) Xt^⌧ (n) ). (7.3.34)
j+1 j
j=0
Thus we have defined V (n) and we will show that these process converge almost surely and
the limit process V is the required solution. Let F (n) , Z (n) , R(n) be defined by
(n)
Ft =b(t, ·, V (n 1) ) (7.3.35)
Z t
(n)
Zt =⇠0 + Fs(n) dXs (7.3.36)
T
0+
1
X
(n) (n)
Rt = a(⌧j , ·, V (n 1)
)1 (n) (n)
(t) (7.3.37)
(⌧ ,⌧ ]
j j+1
j=0
Vt
(n)
=⇠0 +
Z t
0+
(n)
F
Rs(n) dXs . (7.3.38)
A
Let us note that by the definition of {⌧j : j 0}, we have
(n) (n) n
|Ft Rt |  2 . (7.3.39)
We will prove convergence of V (n) employing the technique used in the proof of unique-
R
ness to the SDE Theorem 7.19- namely random time change.

Let be a (F⇧ ) random time change such that Y j = [X j ], 1  j  m are amenable
semimartingales (such a random time change exists as seen in Theorem 7.14). Let (G⇧ ) =
D
( F⇧ ), = [ ] 1 be defined via (7.1.5).

Let c(t, !, ⇣), d(t, !, ⇣) be given by (7.3.26). As noted in the proof of Theorem 7.19, c, d
(n)
satisfy (7.3.2)-(7.3.5). We will transform {⌧i : n 1, i 1}, {V (n) , F (n) , Z (n) , R(n) :
n 1} to the new new time scale. Thus for n 1, j 0 let
(n) (n)
j = [⌧j ], U (n) = [V (n) ], G(n) = [F (n) ], W (n) = [Z (n) ], S (n) = [R(n) ].
Now it can be checked that

(n) (n) (n)
j+1 = inf{s > j : ka(s, ·, U (n 1)
) a( j , ·, U
(n 1)
)k 2 n
(n)
(7.3.40)
or ka(s , ·, U (n 1)
) a( j , ·, U (n 1) )k 2 n
}.
(n) (n) (n)

Each j is a stop time and limj"1 j = 1. Further, U0 = ⇠0 and
1
X
(n) (n) (n 1)
Ut =⇠0 + c( j , ·, U )(Yt^ (n) Yt^ (n) ), (7.3.41)
j+1 j
j=0
(n)
Gt =d(t, ·, U (n 1) ), (7.3.42)
Z t
(n)
Wt =⇠0 + G(n)
r dYr , (7.3.43)
0+
1
X
(n) (n) (n 1)
St = c( j , ·, U )1 (n) (n)
(t), (7.3.44)
( , ]
j j+1
j=0
Z t
(n)
Ut =⇠0 + Sr(n) dYr . (7.3.45)
0+
Also, we have
T
(n) (n) n
|Gt St |  2 . (7.3.46)
Recall that we had shown in (7.3.31) that c satisfies Lipschitz condition with coefficient
H = [K]. For j 1, let
⇢j = inf{t
Then ⇢j are (G⇧ )-stop times and
0 : |Ht |
j
j or |Ht | F j or |Ut
" 1. Further, for all ⇣1 , ⇣2 2 Cd we have
(1)
⇠0 | j} ^ j.
A
sup kc(a, !, ⇣2 ) c(a, !, ⇣1 )k  j sup |⇣2 (a) ⇣1 (a)|. (7.3.47)
0a(s^⇢j ) 0a(s^⇢j )
Now for k 1 and j 1 (fixed), we observe that for all n 2 (using (7.3.13) along with
(7.3.42) and (7.3.43))
R
E[1{|⇠0 |k} sup |Ws(n) Ws(n 1) 2

| ]
0s(t^⇢j )
Z (t^⇢j )
D
 2m(4 + j)E[1{|⇠0 |k} sup |G(n)

s G(n
s
1) 2
| dr] (7.3.48)
0 0s(r^⇢j )
Z (t^⇢j )
2
 2m(4 + j)j E[1{|⇠0 |k} sup |Us(n 1)
Us(n 2) 2
| dr]
0 0s(r^⇢j )
Likewise, using (7.3.46) we get for n 1,

E[1{|⇠0 |k} sup |Ws(n) Us(n) |2 ]
0s(t^⇢j )
Z (t^⇢j )
 2m(4 + j)E[1{|⇠0 |k} sup |G(n) Ss(n) |2 dr] (7.3.49)
s
0 0s(r^⇢j )
n
 2m(4 + j)4 j.
Combining (7.3.48) and (7.3.49), we observe that for n 2 (using for positive numbers
x, y, z, (x + y + z)2  3(x2 + y 2 + z 2 ))
E[1{|⇠0 |k} sup |Us(n) Us(n 1) 2
| ]  6m(4 + j)(4 n
+4 (n 1)
)j
0s(t^⇢j )
Z (t^⇢j ) (7.3.50)
+ 6m(4 + j)j 2 E[1{|⇠0 |k} sup |Us(n 1)
Us(n 2) 2
| dr]
0 0s(r^⇢j )
Let
f (n) (t) = E[1{|⇠0 |k} sup |Us(n) Us(n 1) 2
| ] (7.3.51)
0s(t^⇢j )
Then, writing Cm,j = 30m(4 + j)j 2 , (7.3.50) implies for n 2

Z t
f (n) (t) = Cm,j + Cm,j f (n 1) (r)dr.
0
T
(0) (1)
Since Ut = ⇠0 , by the definition of ⇢j , ft  j 2  Cm,j . Now (7.3.51) implies (via
induction on n) that
(Cm,j t)n
f (n) (t)  Cm,j . (7.3.52)
F n!
and as a consequence (writing |·|2 for the L2 (P ) norm, and recalling ⇢j  j)
1
X
A
k1{|⇠0 |k} sup |Us(n) Us(n 1)
|k2 < 1.
n=1 0s⇢j
1
R
X
k1{|⇠0 |k} sup |Us(n) Us(n 1)
|k2 < 1. (7.3.53)
n=1 0s⇢j
As in the proof of Theorem 3.26, it now follows that for k 1, j 1, P(Nk,j ) = 0 where
D
1
X
Nk,j = {! : 1{|⇠0 (!)|k} sup ( |Us(n) (!) Us(n 1)
(!)|) < 1}.
0s⇢j (!) n=1
Since for all T < 1

P([1
k,j=1 {! : |⇠0 (!)|  k, ⇢j  T }) = 1
(n)
it follows that P(N ) = 0 where N = [1 k,j=1 Nk,j and for ! 62 N , Us (!) converges uniformly
on [0, T ] for every T < 1. So let us define U as follows:
8
<lim (n) c
n!1 Ut (!) if ! 2 N
Ut (!) =
:0 if ! 2 N.
By definition, U is a continuous (G⇧ ) adapted process (since by assumption N 2 F0 = G0 )

and U (n) converges to U uniformly in [0, T ] for every T almost surely (and thus also
ducp (U (n) , U ) ! 0). Also, (7.3.53) yields
lim k1{|⇠0 |k} sup |Us(n) Us(r) |k2 = 0.
n,r!1 0s⇢j
Now Fatou’s Lemma implies

lim k1{|⇠0 |k} sup |Us(n) Us |k2 = 0
n!1 0s⇢j
which is same as
lim E[1{|⇠0 |k} sup |Us(n) Us |2 ] = 0. (7.3.54)
n!1 0s⇢j
Rt
Now defining Gt = d(t, ·, U ) and Wt = ⇠0 + 0 Gs dYs , it follows using the Lipschitz condition
(7.3.47) along with (7.3.54) that
T
lim E[1{|⇠0 |k} sup |Ws(n) Ws |2 ] = 0. (7.3.55)
n!1 0s⇢j
Now (7.3.49), (7.3.54) and (7.3.55) imply that (for all j, k 1)
and hence that

F
E[1{|⇠0 |k} sup |Ws
0s⇢j
Us |2 ] = 0
A
P(Ws = Us 8s 0) = 1.
Recalling the definition of G, W , it follows that U satisfies
Z t
U t = ⇠0 + d(s, ·, U )dYs .
R
0
It now follows that V = [U ] satisfies (7.3.32).
We have shown the existence and uniqueness of solution to the SDE (7.3.32). Indeed,
D
we have explicitly constructed processes V (n) that converge to V . We record this in the
next theorem
Theorem 7.21. Let X 1 , X 2 , . . . X m be continuous semimartingales. Let a, b satisfy con-

ditions (7.3.2)-(7.3.5). Let ⇠ be any F0 measurable random variable. For n 1 let
(n) (n)
{⌧j : j 1} and V be defined inductively by (7.3.33) and (7.3.34) as in the proof
of Theorem 7.20. Let V be the (unique) solution to the SDE
Z t
Vt = ⇠ 0 + b(s, ·, V )dXs .
0+
Then V (n) em
! V and Vt
(n)
converges to Vt in ucc topology almost surely.
Proof. We had constructed in the proof of Theorem 7.20 a (F⇧ ) random time change
and filtration (G⇧ ) = ( F⇧ ) such that U (n) = [V (n) ] converges to U in ucp metric:
ducp (U (n) , U ) ! 0. Now = 1 is also a (G ) random time change, V (n) = [U (n) ] and
⇧
V = [U ]. It follows from Theorem 7.6 that ducp (V (n) , V ) ! 0. Let Ft = b(t, ·, V ). Now
ucp
the Lipschitz condition on a, b- (7.3.4) implies F (n) ! F , where F (n) is defined by (7.3.35)
ucp Rt
and then (7.3.39) implies R(n) ! F . Now Vt = ⇠0 + 0 Fs dXs and (7.3.38) together imply
em
that V (n) ! V . As for almost sure convergence in ucc topology, we had observed that it
holds for U (n) , U and then we can see that same holds for V (n) , V
7.4 Pathwise Formula for solution of SDE

In this section, we will consider the SDE
T
dVt = f (t , H, V )dXt (7.4.1)
where f : [0, 1) ⇥ Dr ⇥ Cd 7! L(d, m), H is an Rr -valued r.c.l.l. adapted process and X
is a continuous semimartingale. Here Dr = D([0, 1), Rd ), Cd = C([0, 1), Rd ). For t < 1,
F
⇣ 2 Cd and ↵ 2 Dr , let ↵t (s) = ↵(t ^ s) and ⇣ t (s) = ⇣(t ^ s). We assume that f satisfies
f (t, ↵, ⇣) = f (t, ↵t , ⇣ t ), 8↵ 2 Dr , ⇣ 2 Cd , 0  t < 1, (7.4.2)
A
t 7! f (t, ↵, ⇣) is an r.c.l.l. function 8↵ 2 Dr , ⇣ 2 Cd (7.4.3)
and that there exists constants for T < 1, CT < 1 such that 8↵ 2 Dr , ⇣1 , ⇣2 2 Cd , 0 
tT
R
kf (t, ↵, ⇣1 ) f (t, ↵, ⇣2 )k  CT (1 + sup |↵(s)|)( sup |⇣1 (s) ⇣2 (s)|). (7.4.4)

0st 0st
As in section 6.2, we will now obtain a mapping that yields a pathwise solution to the
D
SDE (7.4.1).
Theorem 7.22. Suppose f satisfies (7.4.2), (7.4.3) and (7.4.4). Then there exists a map-
ping
: Rd ⇥ Dr ⇥ Cd 7! C([0, 1), L(d, m))
such that for an adapted r.c.l.l. process H and a continuous semimartingale X,
V = (⇠0 , H, X)
yields the unique solution to the SDE
Z t
Vt = ⇠ 0 + f (s , H, V )dX. (7.4.5)
0
7.4. Pathwise Formula for solution of SDE 237
Proof. We will define mappings

(n)
: Rd ⇥ Dr ⇥ Cd 7! C([0, 1), L(d, m))
inductively for n 0. Let (0) (u, ↵, ⇣)(s) = u for all s 0. Having defined (0) , (1) , . . . ,
(n 1) , we define (n) as follows. Fix n and u 2 Rd , ↵ 2 D and ⇣ 2 C .

r d
(n) (n) (n)
Let t0 = 0 and let {tj : j 1} be defined inductively as follows: ({tj : j 1} are
themselves functions of (u, ↵, ⇣), which are fixed for now and we will suppress writing it as
(n) (n) (n)
a function) if tj = 1 then tj+1 = 1 and if tj < 1 then writing
(n 1) (n 1)
(u, ↵, ⇣)(s) = f (s, ↵, (u, ↵, ⇣)),
let
(n) (n) (n 1) (n 1) (n) n
tj+1 = inf{t tj :k (u, ↵, ⇣)(s) (u, ↵, ⇣)(tj )k 2
(n)
T
(n 1) (n 1) n
or k (u, ↵, ⇣)(s ) (u, ↵, ⇣)(tj )k 2 }
(n 1) (u, ↵, ⇣) (n)
(since is an r.c.l.l. function, tj " 1 as j " 1) and
1
X
This defines
(n)
(u, ↵, ⇣)(s) = u +
(n) (u, ↵, ⇣). Now we define

j=0
(n 1)
F
(u, ↵, ⇣)(s)(⇣(t ^ tj+1 )
(n) (n)
⇣(t ^ tj )).
A
8
<lim (n) (u, ↵, ⇣) if the limit exists in ucc topology
n
(u, ↵, ⇣) = (7.4.6)
:0 otherwise.
R
Now it can be seen that
a(s, !, ⇣) = f (s, H(!), ⇣), b(s, !, ⇣) = f (s , H(!), ⇣)
satisfies (7.3.2)-(7.3.5) and

D
(n) (n)
(⇠0 (!), H(!), X(!)) = Vt (!).
(n)
As shown in Theorem 7.21, Vt (!) converges to Vt (!) in ucc topology almost surely
and hence it follows that
P( (⇠0 (!), H(!), X(!)) = Vt (!) 8t) = 1.
This pathwise formula was obtained in [35] and [39]. It was recast in [40] in the form
given in this section.
7.5 Matrix-valued Semimartingales
In this section, we will consider matrix valued semimartingles. The notations introduced
here will be used only in this section and in a corresponding section later. Recall that
L(m, k) is the set of all m ⇥ k matrices. Let L0 (d) denote the set of non- singular d ⇥ d
matrices.
Let X = (X pq ) be an L(m, k)-valued process. X is said to be a semimartingale if each
X pq is a semimartingale. Likewise, X will be said to be a local martingale if if each X pq is
a local martingale and we will say that X 2 V if each X pq 2 V.
If f = (f ij ) is an L(d, m)-valued predictable process such that f ij 2 L(X jq (for all
R
i, j, q), then Y = f dX is defined as an L(d, k)-valued semimartingale as follows: Y =
(Y iq ) where
m Z
X
T
Y iq = f ij dX jq .
j=1
Likewise, if g = (g ij ) is an L(k, d)-valued predictable process such that g ij 2 L(X pi (for all
R
Z pj =
k Z
X
F
i, j, p), then Z = (dX)g is defined as follows: Z = (Z pj ) where
g ij dX pi .
A
i=1
For L(d, d)-valued semimartingales X, Y let [X, Y ] = ([X, Y ]ij ) be the L(d, d)-valued
process defined by
R
d
X
[X, Y ]ij
t = [X ik , Y kj ].
k=1
D
Exercise 7.23. Let X, Y be L(d, d)-valued semimartingales. Show that

Z t Z t
Xt Y t = X0 Y 0 + Xs dYs + (dXs )Ys + [X, Y ]t . (7.5.1)
0+ 0+
The relation (7.5.1) is the matrix analogue of the integration by parts formula (4.6.7).
Recall our terminology : We say that a L(d, d)-valued process h is L0 (d)-valued if
P(ht 2 L(d) 8t 0) = 1.
Exercise 7.24. Let X, Y be L(d, d)-valued continuous semimartingales and let f, g, h be

L(d, d)-valued predictable locally bounded processes. Further let h be L0 (d)-valued. Let W =
7.5. Matrix-valued Semimartingales 239
R R R R
f dX, Z = (dX)g, U = (dX)h and V = h 1 dY . Show that
Z t
[W, Y ]t = f d[X, Y ]. (7.5.2)
0
Z t
[Y, Z]t = (d[Y, X])g. (7.5.3)
0
Z t Z t
gdW = gf dX. (7.5.4)
0 0
Z t Z t
(dZ)f = (dX)gf. (7.5.5)
0 0
Z t Z t
f dZ = (dW )g. (7.5.6)
0 0
[U, V ]t = [X, Y ]t . (7.5.7)
T
R
In view of (7.5.6), with f, g, X, W, Z as in the previous exercise, we will denote f dZ =
R R
(dW )g = f (dX)g.
We can consider an analogue of the SDE (7.3.1)
F
dUt = b(t, ·, U )dYt , t 0, U0 = ⇠0
where now Y is an L(m, k)-valued continuous semimartingale, U is an L(d, k)-valued pro-

(7.5.8)
A
cess, ⇠0 is L(d, k)-valued random variable and here
b : [0, 1) ⇥ ⌦ ⇥ C([0, 1), L(d, k)) ! L(d, m).

R
Essentially the same arguments as given earlier in the section would give analogues of
existence and uniqueness results for the equation (7.5.8).
Exercise 7.25. Formulate and prove analogues of Theorem 7.19, Theorem 7.20 and Theorem
D
7.21 for the equation (7.5.8).
Exercise 7.26. Let X be an L(d, d)-valued continuous semimartingale with X(0) = 0 and
let I denote the d ⇥ d identity matrix. Show that the equations
Z t
Yt = I + Ys dXs (7.5.9)
0
and Z t
Zt = I + (dXs )Zs (7.5.10)
0
admit unique solutions.
The solutions Y, Z are denoted respectively by e(X) and e0 (X) and are the left and
right exponentials of X.
Exercise 7.27. Let X be an L(d, d)-valued continuous semimartingale with X0 = 0. Let

Y = X + [X, X]. Let W = e(X) and Z = e0 (Y ). Show that
(i) [Y, Y ] = [X, X].
(ii) [X, Y ] = [X, X].

R
(iii) [W, Z] = W (d[X, Y ])Z
(iv) W Z = I
The relation (iv) above implies that for any L(d, d)-valued continuous semimartingale X with
X0 = 0, e(X) is L0 (d)- valued and
T
[e(X)] 1
= e0 ( X + [X, X]). (7.5.11)
Exercise 7.28. Let X 1 , X 2 , X 3 , X 4 be L(d, d)-valued continuous semimartingales with X0j =

0, j = 1, 2, 3, 4. Show that
F R
(i) e(X 1 + X 2 + [X 1 , X 2 ]) = e(X̃ 1 )e(X 2 ) where X̃ 1 = Y 2 (dX 1 )(Y 2 ) 1 and Y 2 = e(X 2 ).
R
A
(ii) e(X 1 + X 2 ) = e(X̃ 1 )e(X̃ 2 ) where X̃ 1 = Y 2 (dX 1 )(Y 2 ) 1 , X̃ 2 = X 2 [X 1 , X 2 ] and
Y 2 = e(X̃ 2 ).
R
(iii) e(X 3 )e(X 2 ) = e(X̃ 3 + X 2 + [X̃ 3 , X 2 ]) where X̃ 3 = (Y 2 ) 1 (dX 3 )Y 2 and Y 2 = e(X 2 ).
R
Hint: For (i), Start with right hand side and use integration by parts formula (7.5.1) and
simplify. For (ii), note that X 1 + X̃ 2 + [X 1 , X̃ 2 ] = X 1 + X 2 and use (i). For (iii) note that
R
if we let X 1 = X̃ 3 then Y 2 (dX 1 )(Y 2 ) 1 = X 3 .
D
Exercise 7.29. Let Y be an L0 (d)-valued continuous semimartingale with Y0 = I. Let

Rt
Xt = 0+ Y 1 dY . Show that
Y = e(X).
For an L0 (d)-valued continuous semimartingale Y with Y0 = I, we define log(Y ) =

Rt R
1 dY and log0 (Y ) = t (dY )Y 1 . We then have
0+ Y 0+
e(log(Y ) = Y, e0 (log0 (Y )) = Y.
Likewise, for any L(d, d)-valued continuous semimartingale X with X0 = 0, we have
log(e(X) = X, log0 (e0 (X)) = X.
Exercise 7.30. Let Let X be an L(d, d)-valued continuous semimartingales with X0 = 0 and
Y be an L0 (d)-valued continuous semimartingale with Y0 = I . Then show that
(i) X is a local martingale if and only if e(X) is a local martingale.
(ii) X 2 V if and only if e(X) 2 V
(iii) Y is a local martingale if and only if log(Y ) is a local martingale
(iv) Y 2 V if and only if log(Y ) 2 V
Exercise 7.31. Let Y be an L0 (d)-valued continuous semimartingale with Y0 = I. Show

that Y admits a decomposition Y = M A where M0 = I, A0 = I, M is a continuous local
martingale and A 2 V. Further show that this decomposition is unique.
Hint: Let X = log(Y ) and use exercise 7.28 to connect multiplicative decomposition of Y and
T
additive decomposition of X.
The exercises given in this section are from [36].
F
A
R
D
Chapter 8
Predictable Increasing Processes
We have discussed predictable -field and seen the crucial role played by predictable inte-
T
grands in the theory of stochastic integration. In our treatment of the integration, we have
so far suppressed another role played by predictable processes. In the decomposition of
semimartingales (Theorem 5.48) the process A with finite variation paths turns out to be
of the theory of stochastic integration. F

a predictable process. Indeed, this identification played a major part in the development
In this chapter, we will make this identification and prove the Doob-Meyer decomposi-
A
tion theorem obtaining the predictable quadratic variation hM, M i of a square integrable
martingale. We will also introduce the notion of a predictable stop time.
An important step towards the proof of Doob-Meyer decomposition theorem is: An
R
r.c.l.l. adapted process A with finite variation paths, A0 = 0, E[sup0tT |At | ] < 1 is
predictable if and only if it is natural, i.e. for all bounded r.c.l.l. martingales N , [N, A] is
also a martingale.
D
This result is usually stated assuming that the underlying filtration is right continuous.
We will prove its validity without assuming this. However, some of the auxiliary results do
require right continuity of -fields, which we state explicitly.
8.1 The -field F⌧
Recall that for a stop time ⌧ with respect to a filtration (F· ), the stopped field F⌧ is
defined by
F⌧ = {A 2 ([t Ft ) : A \ {⌧  t} 2 Ft 8t < 1.}
242
8.1. The -field F⌧ 243
We had seen that for every r.c.l.l. adapted process X and a stop time ⌧ , X⌧ is F⌧ measur-
able. We now define the pre-stopped -field F⌧ as follows.
Definition 8.1. Let ⌧ be a stop time with respect to a filtration (F· ). Then
F⌧ = (F0 [ {A \ {t < ⌧ } : A 2 Ft , t < 1}).
Exercise 8.2. Let ⌧ be the constant stop time ⌧ = t, t > 0. Show that
Ft = ([s<t Fs ).
Exercise 8.3. Let 0  s < t. Show that Fs+ ✓ Ft .
We note some basic properties of the pre-stopped -field in the next result. Recall the
definition (2.32) of f⌧ , (for a process f ) whereby f⌧ = f⌧ 1{⌧ <1} .
T
Theorem 8.4. Let ⌧ , be stop times with respect to a filtration (F· ). Then
(i) ⌧ is F⌧ measurable.
(ii) F⌧
(iii) If
✓ F⌧ .
F
< ⌧ on ⌧ > 0 ( i.e. ⌧ (!) > 0 implies (!) < ⌧ (!)), then F ✓ F⌧ .
A
(iv) If A 2 F then (A \ { < ⌧ }) 2 F⌧ and in particular, { < ⌧ } 2 F⌧ .
(v) If f is a predictable process then f⌧ is F⌧ measurable.

R
(vi) Let W be a F⌧ measurable random variable. Then there exists a predictable process
f such that f⌧ 1{⌧ <1} = W 1{⌧ <1} .
(vii) Let U be a F⌧ measurable random variable with E[ |U | ] < 1 and E[U | F⌧ ] = 0. Let
D
Mt = U 1[⌧,1) (t). Then M is a martingale.
Proof. Since {t < ⌧ } 2 F⌧ by definition, (i) follows.

For (ii) note that if A 2 Ft , t < 1 and B = A \ {t < ⌧ }, then for any s 2 [0, 1),
B \ {⌧  s} is empty if s  t and B \ {⌧  s} 2 Fs if t < s. Thus B 2 F⌧ . This proves
(ii).
For (iii), let A 2 F . Note that writing Q+ to be the set of rationals in [0, 1),
A = ([r2Q+ (A \ {  r} \ {r < ⌧ })) [ {A \ { = ⌧ = 0}}
and A \ {  r} 2 Fr . Thus A 2 F⌧ .
244 Chapter 8. Predictable Increasing Processes
For (iv) note that for A 2 F ,
(A \ { < ⌧ }) = [r2Q+ ((A \ {  r}) \ {r < ⌧ })
along with (A \ {  r}) 2 Fr implies (A \ { < ⌧ }) 2 F⌧ . Taking A = ⌦ we conclude

{ < ⌧ } 2 F⌧ .
For (v), recall that P is the smallest -field generated by processes of the form (see
(4.2.1))
m
X
fs = a0 1{0} (s) + aj+1 1(sj ,sj+1 ] (s)
j=0
where 0 = s0 < s1 < s2 < . . . < sm+1 < 1, m 1, a0 is bounded F0 measurable and for
1  j  (m + 1), , aj is a bounded Fsj 1 measurable random variable. For such an f and
↵ < 0,
T
m
[
{f⌧  ↵} = ({a0  ↵} \ {⌧ = 0}) [ ( {aj+1  ↵} \ {sj < ⌧  sj+1 }). (8.1.1)
j=0
Now aj+1 is Fsj measurable implies {aj+1  ↵} \ {sj < ⌧ } 2 F⌧ and since ⌧ is F⌧
together imply that {f⌧  ↵} 2 F⌧ . For ↵

F
measurable, so does {aj+1  ↵} \ {sj < ⌧  sj+1 }. This and the fact that F0 ✓ F⌧
0, the same result follows as the only
di↵erence is that the set on left hand side in (8.1.1) also has {sj+1 < ⌧ } in the union on
A
right hand side. Of course, this set is also in F⌧ . Thus f⌧ is F⌧ measurable for simple f
as given above. The result (v) follows by invoking the Monotone class theorem, Theorem
2.64.
R
For (vi), if W = 1B where B = A \ {t < ⌧ } with A 2 Ft , then we can take f = 1A 1(t,1)

while if B 2 F0 , we can take f = 1B 1[0,1) . Thus the required result holds if W = 1B when
B 2 H = F0 [ {A \ {t < ⌧ } : A 2 Ft , t 0}.
D
Thus if G denotes the class of simple functions over H, if follows that the result (vi) is true
if W 2 G. Note that H is closed under intersection and hence G is an algebra. Denoting
by A the class of W such that (vi) is true, it follows that G ✓ A. It is easy to check that A
is bp-closed. Since F⌧ = (H), the result (vi) follows from the Monotone class theorem,
Theorem 2.64.
For (vii), invoking Theorem 2.39 it follows that M is an r.c.l.l. (F⇧ ) adapted stochastic
process. To show that M is a martingale, suffices to show (see Theorem 2.55) that for all
bounded stop times ,
E[M ] = 0. (8.1.2)
8.2. Predictable Stop Times 245
Here M = U 1{⌧  } . Since {⌧  } = {⌧ > }c 2 F⌧ (by part (iv) above) and

E[U | F⌧ ] = 0 by assumption, (8.1.2) follows.
The next result is a stop time analogue of Exercise 8.3.
Theorem 8.5. Let be an (F⇧+ )-stop time and ⌧ be a (F⇧ )-stop time. Then
A 2 F + ) A \ { < ⌧ } 2 F⌧ .
As a consequence, if F0+ = F0 , {⌧ > 0} ✓ { < ⌧ } and {⌧ = 0} ✓ { = 0} then
F + ✓ F⌧ .
Proof. Fix A 2 F + . For t > 0, note that

[
T
A \ { < ⌧ } = { A \ {  r} \ {s < ⌧ } : r < s rationals in [0, t]}
Now for r < s, A \ {  r} 2 Fr+ ✓ Fs . Hence A \ { < ⌧ } is a countable union of sets in

F⌧ and thus belongs to F⌧ . On the other hand A \ { = 0} 2 F0+ = F0 ✓ F⌧ . Thus,
A 2 F⌧ .
8.2 Predictable Stop Times

F
A
For stop times , ⌧ we define Stochastic Intervals as follows:
e:
( , ⌧ ] = {(t, !) 2 ⌦ (!) < t  ⌧ (!)}
R
e:
[ , ⌧ ] = {(t, !) 2 ⌦ (!)  t  ⌧ (!)}
and likewise, [ , ⌧ ), ( , ⌧ ) are also defined. The graph [⌧ ] of a stop time is defined by
D
e
[⌧ ] = {(⌧ (!), !) 2 ⌦}.
With this notation, [⌧, ⌧ ] = [⌧ ]. Note that for any , ⌧ , the processes f, g defined by
ft = 1[ ,⌧ ) (t), gt = 1( ,⌧ ] (t) and ht = 1[0,⌧ ] (t) are adapted processes. While f is r.c.l.l., g
and h are l.c.r.l. and thus predictable. As a consequence we get that for stop times , ⌧
with 0   ⌧ , we have
[0, ⌧ ] 2 P, ( , ⌧ ] 2 P. (8.2.1)
On the other hand if ⌧ is a [0, 1)-valued random variable such that ft = 1[0,⌧ ) (t) is adapted,
then ⌧ is a stop time, since in that case {ft = 0} = {⌧  t} 2 Ft .
Exercise 8.6. Let X be a continuous adapted process such that XT = 0. Let

⌧ = inf{t 0 : |Xt | = 0} (8.2.2)
and for n 1, let
n
n = inf{t 0 : |Xt |  2 }. (8.2.3)
Let Y be an r.c.l.l. process such that Y0 = 0 and M be a martingale such that M0 = 0. Show
that
(i) ⌧ and n for n 1 are bounded stop times with n  ⌧.
(ii) for all n 1, {⌧ > 0} ✓ { n < ⌧ }.
(iii) n " ⌧ as n ! 1.
T
(iv) [⌧ ] 2 P.
(v) Y n converges to Y⌧ pointwise.
(vi) M converges to M⌧ in L1 (P).

n
(vii) E[( M )⌧ | F⌧ ] = 0.
F
The stop time ⌧ in the exercise above has some special properties. Such stop times are
A
called predictable.
Definition 8.7. A stop time ⌧ is said to be predictable if

R
[⌧ ] 2 P. (8.2.4)
We have noted that for every stop time ⌧ , (⌧, 1) 2 P. Thus ⌧ is predictable if and
only if
D
[⌧, 1) 2 P. (8.2.5)
It follows that maximum as well as minimum of finitely many predictable stop times is
predictable. Indeed, supremum of countably many predictable stop times {⌧k : k 1} is
predictable since
[ sup ⌧k , 1) = \1
k=1 [⌧k , 1).
1k<1
Also, it follows that if ⌧ is predictable, then so is ⌧ ^ k for all k.
Exercise 8.8. Let be any stop time and a 2 [0, 1) be a constant. Let ⌧ = + a. Show
that ⌧ is predictable.
We will be proving that predictable stopping times are characterized by properties

(ii), (iii) as well as by (vii) in the exercise 8.6 above (when the underlying filtration is
right continuous).
Towards this goal, we need the following result from Metivier [48] on the predictable -
field, interesting in its own right. This is analogous to the result that every finite measure
on the Borel -field of a complete separable metric space is regular. Even the proof is
very similar, with continuous adapted processes playing the role of bounded continuous
functions and zero sets of such processes playing the role of closed sets. See [18].
e P) and let
Theorem 8.9. Let µ be a finite measure on (⌦,
e : Xt (!) = 0} : X is a bounded continuous adapted process.}
C = {{(t, !) 2 ⌦
Then for all ✏ > 0 and for all 2 P there exist ⇤0 , ⇤1 such that ⇤0 2 C, ⇤c1 2 C,
T
⇤0 ✓ ✓ ⇤1
and
F
µ(⇤1 \ (⇤0 )c ) < ✏.
Proof. Easy to see that C is closed under finite unions and finite intersections: if X 1 , X 2
A
are bounded continuous processes, so are Y = X 1 X 2 and Z = |X 1 | + |X 2 |. Indeed, C is
closed under countable intersections as X j , j 1 bounded continuous (w.l.g. bounded by
P
1) yields that Z = 1 j j
j=1 2 |X | is a bounded continuous adapted process and
R
{Z = 0} = \j {X j = 0}.
Let G be the class of sets in P for which the desired conclusion holds. Now it can be
checked using properties of C noted in the previous paragraph that G is a -field.
D
For any continuous adapted process X
{X  ↵} = {Y = 0} where Y = max(X, ↵) ↵.
Thus {X  ↵} 2 C. Since
1 1 c
{X = 0} = \n {|X| < } = \n { |X|  }
n n
it follows that C ✓ G. Invoking Proposition 4.1, part (iii) we now conclude that G = P.
The following result gives some insight as to why stop times satisfying (8.2.4) are called
predictable.
Theorem 8.10. Let ⌧ be (F⇧ )-stop time. Then ⌧ is predictable if and only if there exist
(F⇧+ )-stop times ⌧ n such that ⌧ n  ⌧ n+1  ⌧ , ⌧ n " ⌧ and ⌧ n < ⌧ on ⌧ > 0.
Proof. Let us take the easy part first. If {⌧ n : n 1} as in the statement exist then noting
that
[⌧, 1) \ {(0, 1) ⇥ ⌦} = \1 n
n=1 (⌧ , 1)
it follows that [⌧, 1) \ {(0, 1) ⇥ ⌦} 2 P(F⇧+ ). Thus using Corollary 4.5 we conclude
[⌧, 1) \ {(0, 1) ⇥ ⌦} 2 P(F⇧ ).
Since ⌧ is a (F⇧ )-stop time, {⌧ = 0} 2 F0 and we can thus conclude that
[⌧, 1) 2 P(F⇧ ).
Thus ⌧ is predictable.
T
e P)
For the other part, suppose (8.2.4) holds. Consider the finite measure µ on (⌦,
defined by
µ( ) = P({! : (⌧ (!), !) 2 })
Z
F
or equivalently for a positive bounded predictable f
f dµ = E[f⌧ ].
A
For m 1, get bounded continuous adapted processes X m such that
{X m = 0} ✓ [⌧ ] (8.2.6)
R
and
µ([⌧ ] \ ({X m = 0}c ))  2 m
. (8.2.7)
D
Let ⇣ m = inf{t 0 : |Xtm | = 0}. Then (8.2.6) and (8.2.7) together imply that ⇣ m is either
equal to ⌧ or 1 and
P(⌧ 6= ⇣ m )  2 m
. (8.2.8)
Let = inf{t : |Xtm |  2 n }. Easy to see that m,n  ⇣ m and if 0 < ⇣ m < 1 then
m,n
m m ⇤ 1 1
m,n < ⇣ and m,n " ⇣ as n ! 1. For u, v 2 [0, 1], let d (u, v) = | tan (u) tan (v)|.
Then d⇤ is a metric for the usual topology on [0, 1]. Since m,n " ⇣ m as n ! 1, we can
choose n = nm large enough so that denoting m,nm = m we have m  ⇣ m and further
m < ⇣ m on 0 < ⇣ m < 1 and
P(d⇤ ( m
, ⇣ m) 2 m
)2 m
(8.2.9)
Let Nm = {d⇤ ( m , ⇣ m ) 2 m } [ {⌧ 6= ⇣ m } and N = lim supm!1 Nm = \1 1

m=1 [n=m
Nn . By Borel-Cantelli Lemma and the probability estimates (8.2.8)and 8.2.9, we conclude
P(N ) = 0. For ! 62 N , 9m0 = m0 (!) such that for m m0 , ⇣m (!) = ⌧ (!), and
⇤ m m m
d ( (!), ⇣ (!))  2 . Recall that for all m 1, m m
(!)  ⇣ (!) for all ! and for any
m
! such that 0 < ⇣ (!) < 1, by construction m (!) < ⇣ m (!).
Let ⌧ m = inf{ k : k m}. Then ⌧ m are (F⇧+ )-stop times such that for ! 62 N ,
⌧ m (!)  ⌧ m+1 (!)  ⌧ (!), 8m 1,
⌧ m (!) < ⌧ (!) if ⌧ (!) < 1
and
d⇤ (⌧ m (!), ⌧ (!))  2 m
.
Thus {⌧ n } so constructed satisfy required properties.
T
Remark 8.11. The stopping times {⌧ n : n 1} in the Theorem above are said to announce
the predictable stop time ⌧ . Indeed, this characterization was the definition of predictability of
stop times in most treatments.
F
Here are two observations linking the two filtrations (F⇧ ), (F⇧+ ) and stop times and
martingales.
A
Lemma 8.12. Let ⌧ be a (F⇧ )-stop time. Then
[⌧ ] 2 P(F⇧+ ) =) [⌧ ] 2 P(F⇧ ).
Proof. Let f = 1[⌧ ] . Then f0 = 1{⌧ =0} is F0 measurable as ⌧ is (F⇧ )-stop time. Now the
R
conclusion - namely f being (F⇧ )-predictable follows from Corollary 4.4.
Lemma 8.13. Let M be an r.c.l.l. (F⇧ )-martingale. Then M is also a (F⇧+ )-martingale.
D
Proof. Fix s < t. Let un = s + 2 n. Note that

E[Mt | Fun ] = Mun ^t .
Since Fs+ = \n Fun using Lemma 1.37 we conclude
E[Mt | Fs+ ] = Ms .
We reiterate here that when the underlying filtration is required to be right continuous,
we will state it explicitly. Otherwise martingales, stop times, predictable etc. refer to the
filtration (F⇧ ). Here is a consequence of predictability of stop times.
Theorem 8.14. Let ⌧ be a bounded predictable stop time. Then for all martingales M
with M0 = 0 we have
E[( M )⌧ | F⌧ ] = 0 (8.2.10)
Proof. Let T be a bound for ⌧ and let ⌧ n be a sequence of F⌧+ -stop times announcing ⌧
as in Theorem 8.10 above. If ⌧ > 0, then M⌧ n converges to M⌧ almost surely whereas if
⌧ = 0 then ⌧ n = 0 for all n and M⌧ n = 0 and M⌧ = 0 by definition of M0 = 0. Thus
we conclude that M⌧ n converges to M⌧ almost surely. On the other hand ⌧ n  ⌧ and the
martingale property of M gives E[M⌧ | F⌧+n ] = M⌧ n - see Corollary 2.54. Now Theorem
1.36 along with (8.2.21) yields
E[M⌧ | F⌧+ ] = M⌧ . (8.2.11)
Now (8.2.10) follows from this as M⌧ is F⌧ measurable and F⌧ ✓ F⌧+ .
T
We now observe that (8.2.10) charaterizes predictable stop times when the filtration is
right continuous.
are equivalent.
(i) ⌧ is predictable, i.e. [⌧ ] 2 P(F⇧ ).

F
Theorem 8.15. Let ⌧ be a bounded stop time for the filtration (F⇧ ). Then the following
A
(ii) For all bounded (F⇧+ ) martingales M with M0 = 0, one has
E[( M )⌧ | F⌧+ ] = 0. (8.2.12)

R
(iii) For all bounded (F⇧+ ) martingales M with M0 = 0, one has
E[( M )⌧ ] = 0. (8.2.13)
D
Proof. If [⌧ ] 2 P(F⇧ ) then of course [⌧ ] 2 P(F⇧+ ) and hence (ii) holds as seen in Theorem
8.14. Thus (i) implies (ii).
That (ii) implies (iii) is obvious.
Let us now assume that (8.2.13) holds for all bounded (F⇧+ )-martingales M . We will
show that there exists a sequence of stop times announcing ⌧ . In view of Theorem 8.10,
this will prove (i) completing the proof.
Let N be the r.c.l.l. version of the martingale E[ ⌧ | Ft+ ]. Let Mt = Nt N0 and
Zt = Nt t. Noting that N⌧ = E[ ⌧ | F⌧+ ] = ⌧ by Theorem 2.53, we have Z⌧ = 0. Let
n
n = inf{t 0 : Zt < 2 }.
We will show that n are (F⇧+ )-stop times and announce ⌧ . Clearly, n  n+1  ⌧ for all
n. As (F⇧+ ) is right continuous, n is a (F⇧+ )-stop time by Lemma 2.46.
By definition of n we have Z n  2 n i.e. N n n  2
n . Further, if
n > 0, then
by left continuity of paths of Z , we also have
n
Z n 2 . (8.2.14)
We have seen that E[NT ] = E[⌧ ] and N being a martingale, we have E[N n ] = E[N0 ] =
n , we conclude
E[NT ] and hence E[N n ] = E[⌧ ]. Since N n n 2
n
E[⌧ n] 2 . (8.2.15)
Since n  n+1  ⌧ for all n we conclude that
lim n = ⌧. (8.2.16)
n!1
Remains to prove that on {⌧ > 0}, < ⌧ . For this, we will first prove that
T
n
P(Zt 1{t⌧ } 0 8t  T ) = 1. (8.2.17)

To see this note that for A 2 Ft , A \ {t  ⌧ } 2 Ft and hence
F
E[1A Zt 1{t⌧ } ] = E[1A (⌧ t)1{t⌧ } ] 0.
Since this holds for all A 2 Ft and Zt 1{t⌧ } is Ft measurable, it follows that for each t
A
Zt 1{t⌧ } 0 a.s.
Now right continuity of t 7! Zt shows the validity of (8.2.17). It now follows that Z⌧
0 a.s. and hence
R
N⌧ ⌧ a.s. (8.2.18)
On the other hand, M is a bounded martingale with M0 = 0 and hence in view of the
assumption (8.2.13) on ⌧ , it follows that E[( M )⌧ ] = 0. Noting that
D
( M )⌧ = ( N )⌧ 1{⌧ >0}
we have E[( N )⌧ 1{⌧ >0} ] = 0. Now using N⌧ = ⌧ we conclude
E[N⌧ 1{⌧ >0} ] = E[N⌧ 1{⌧ >0} ] = E[⌧ 1{⌧ >0} ]. (8.2.19)
In view of (8.2.18)-(8.2.19) we conclude
N⌧ 1{⌧ >0} = ⌧ 1{⌧ >0} a.s. (8.2.20)
If ⌧ > 0 and n > 0, then as seen in (8.2.14), Z n 2 n and so N n > n a.s. In
view of (8.2.20), this implies n < ⌧ a.s. on ⌧ > 0. Thus { n } announces ⌧ and as a
consequence ⌧ is predictable.
Theorem 8.16. Let ⌧ be a (F⇧+ )-predictable stop time and let ⌧ n be as in Theorem 8.10
announcing ⌧ . Then
1
[
( F⌧+n ) = F⌧+ . (8.2.21)
n=1
Proof. As seen in Theorem 8.4 F⌧+n ✓ F⌧+ . To see the other inclusion, let B 2 F⌧+ .
If B 2 F0+ , then B 2 F +n for each n 1. If B = A \ {t < ⌧ }, A 2 Ft+ . Then
Bn = A \ {t < ⌧ n } 2 F⌧+n ✓ F⌧+n . Thus
1
[
Bn 2 ( F⌧+m )
m=1
and of course easy to see that B = [1
n=1 Bn completing the proof.
Exercise 8.17. Let ⌧ be a (F⇧ )-predictable stop time and let ⌧ n be as in Theorem 8.10
T
announcing ⌧ . Suppose F0 = F0+ . Show that
1
[
( F⌧+n ) = F⌧ . (8.2.22)
Thus conclude F⌧ = F⌧+ .

n=1
F
Let ⌧ be a stop time ⇠ be a F⌧ measurable random variable. Then h = ⇠ 1(⌧,1) is an
A
l.c.r.l. adapted process and hence predictable.
The next result refines this observation when ⌧ is predictable.
R
Theorem 8.18. Let ⌧ be a predictable stop time and let ⇠ be a F⌧ measurable random
variable. Then f = ⇠ 1[⌧,1) and g = ⇠ 1[⌧ ] are predictable processes.
Proof. Note that f = g + h where h = ⇠ 1(⌧,1] and that h is predictable being l.c.r.l.
D
adapted. Thus suffices to show that g is predictable.

For A 2 Fs , B = A \ {s < ⌧ }, observe that
1B (!)1[⌧ ] (t, !) = 1B (!)1(s,1) (t)1[⌧ ] (t, !).

The process 1B (!)1(s,1) (t) is l.c.r.l. adapted and hence predictable while 1[⌧ ] (t, !) is pre-
dictable because ⌧ is predictable. Thus, the desired conclusion namely g is predictable-
is true when ⇠ = 1B , B = A \ {s < ⌧ } and A 2 Fs . It is easily seen to be true when
⇠ = 1B , B 2 F0 . Since the class of bounded F⌧ measurable random variables ⇠ for which
the desired conclusion is true is bp-closed, the conclusion follows by invoking the monotone
class theorem - Theorem 2.64.
We will next show that the jump times of an r.c.l.l. adapted process X are stop times
and if the process is predictable, then the stop times can also be chosen to be predictable.
Lemma 8.19. Let X be an r.c.l.l. (F⇧ ) adapted process with X0 = 0. For ↵ > 0 let
⌧ = inf{t > 0 : | X|t ↵}.
Then ⌧ is a stop time with ⌧ (!) > 0 for all !. Further, ⌧ < 1 implies | X|t ↵.
Proof. Note that for any ! 2 ⌦ and T < 1
{t 2 [0, T ] : | X(!)|t ↵}
is a finite set since X has r.c.l.l. paths. Thus ⌧ (!) < 1 implies | X(!)|⌧ (!) ↵. Moreover,
{! : ⌧ (!)  t} = {! : 9s 2 [0, t] : | X|s (!) ↵}. (8.2.23)
T
It now follows that (writing Qt = {r 2 [0, t] : r is rational} [ {t}) for ! 2 ⌦, ⌧ (!)  t if
and only if 8n 1, 9sn , rn 2 Qt , 0 < sn < rn < sn + n1 ,
1
|Xrn (!)
F
Xsn (!)| ↵ n.
To see this, if such sn , rn exist, then choosing a subsequence nk such that
snk , rnk , Xsnk (!), Xrnk (!)

(8.2.24)
A
1
converge, using sn < rn < sn + n and (8.2.24), it follows that
snk ! u, rnk ! u, for some u, 0 < u  t.

R
Since |Xsnk Xrnk | ↵ n1k and Xsnk , Xrnk are converging, the only possibility is that
Xsnk (!) ! Xu , Xrnk (!) ! Xu and |Xu (!) Xu (!)| ↵. Hence ⌧ (!)  t. For the
other part, if ⌧ (!) = s  t, using Q is dense in [0, t] and t 2 Qt , we can get sn , rn 2 Qt ,
t
D
0 < sn < s  rn < sn + n1 ,

1 1
|Xs (!) Xsn (!)|  2n , |Xrn (!) Xs (!)|  2n
1
and hence using | X(!)|s ↵, we get |Xrn (!) Xsn (!)| ↵ n. Thus
{⌧  t} = \1
n=1 ([{s,r2Qt ,0<s<rs+ 1 } {|Xs Xr | ↵ 1
n }).
n
Thus ⌧ is a stop time. Since X0 = 0 implies ( X)0 = 0, (8.2.23) implies ⌧ > 0.
The next result shows that the jumps of an r.c.l.l. process can be covered by a countable
sequence of stop times.
Lemma 8.20. Let A be an r.c.l.l. (F⇧ ) adapted process with A0 = 0. For n 1 and ! 2 ⌦,
let 0n = 0 and for i 1 let i+1
n (!) = 1 if n (!) = 1 and
i
n n 1
i+1 (!) = inf{t > i (!) : |( A)|t (!) n }. (8.2.25)
Then
(i) For all n 1, i 1, n is a stop time and n > 0.
i i
n 1 n n
(ii) 8!, i (!) < 1 implies |( A)| n
i (!)
(!) n and i (!) < i+1 (!).
(iii) 8!, limi!1 n = 1.

i (!)
e = [0, 1) ⇥ ⌦)
(iv) (recall ⌦
e : |( A)t (!)|
{(t, !) 2 ⌦ 1 n e
n} = {( i (!), !) : i 1} \ ⌦. (8.2.26)
(v) If A is also predictable, then { n : i 1, n 1} are predictable stop times.
T
i
Proof. Fix n 1. The Lemma 8.19 implies that 1n is a stop time. We will prove that
n
i are stop times by induction. Assuming this to be the case for i = j, consider the
conclude that j+1n is a stop time and if jn < 1 then j+1 F

process Yt = At At^ jn . Applying Lemma 8.19 to the r.c.l.l. adapted process Y , we
n > jn . This completes the
induction step proving (i), (ii). Since an r.c.l.l. function can have only finitely many jumps
A
larger than n1 in any finite interval, it follows that limi!1 in (!) = 1. Hence for a fixed
1
!, the set {t : |( A)t (!)| n } \ [0, T ] is finite for every T and is thus contained in
{ in (!) : 1  i  m} for a sufficiently large m and thus
R
e : |( A)t (!)|
{(t, !) 2 ⌦ 1 n e
n} ✓ {( i (!), !) : i 1} \ ⌦.
Part (ii) proven above implies that the equality holds proving (8.2.26). For (v), if A is
predictable, then A = A A is also predictable (since A is l.c.r.l. adapted). Also
D
( in 1 , in ] 2 P as its indicator is a l.c.r.l. adapted process. In view of (8.2.26) for i 1

n e : |( A)t (!)|
= {(t, !) 2 ⌦ 1 n n
[ i] n} \( i 1, i]
and thus if A is predictable, [ n 2 P i.e. n

i] i is predictable.
The previous result shows that the jumps of an r.c.l.l. adapted process can be covered
by countably many stop times. We now show that one can choose finite or countably many
stop times that cover jumps and have mutually disjoint graphs. Note that stop times are
allowed to take 1 as its value and the graph of a stop time is a subset of [0, 1) ⇥ ⌦ and
thus several (or all!) may take value 1 for an ! without violating the requirement that
the graphs are mutually disjoint.
Theorem 8.21. Let X be an r.c.l.l. (F⇧ ) adapted process with X0 = 0. Then there exists
a sequence of stop times {⌧m : m 1}, such that
[1
{( X) 6= 0} = [⌧m ] (8.2.27)
m=1
and further that for m 6= n, [⌧m ] \ [⌧n ] = ;. As a consequence
X1
( X) = ( X)⌧m 1[⌧m ] . (8.2.28)
m=1
Further, if the process X is also predictable, then the stop times {⌧m : m 1} can be
chosen to be predictable and then ( X)⌧m are F⌧m measurable.
Proof. Let { n : i 0, n 1} be defined by 8.2.25. For k = 2n (2i 1), i 1, n 1 let

i
n
⇠k = i.
T
Then the sequence of stop times {⇠k : k 1} is just an enumeration of { n :i 1, n 1}
i
and thus in view of (8.2.26) we have
e : |( X)t (!)| > 0} = {(⇠k (!), !) : k
{(t, !) 2 ⌦ e
1} \ ⌦. (8.2.29)
8
<⇠ if ! 2 \m
F
However, the graphs of {⇠k : k 1} may not be disjoint. Define ⌧1 = ⇠1 and define stop
times ⌧k : k 2 inductively as follows. Having defined stop times ⌧k , 1  k  m let
A
m+1 (!) j=1 {⇠m+1 (!) 6= ⌧j (!), ⌧j (!) < 1}
⌧m+1 (!) = (8.2.30)
:1 otherwise .
Fix t. Note that
R
{⌧m+1  t} = {⇠m+1  t} \ (\m

j=1 {⇠m+1 6= ⌧j })
and A = \m
j=1 {⇠m+1 6= ⌧j } 2 F⇠m+1 by Theorem 2.52. Thus,
{⌧m+1  t} = {⇠m+1  t} \ A 2 Ft .
D
and hence each ⌧m+1 is also a stop time. Thus {⌧k : k 1} is a sequence of stop times.
In view of (8.2.29) and the definition (8.2.30) of ⌧m+1 , we can check that the sequence
{⌧m : m 1} satisfies the required conditions, (8.2.27) and (8.2.28).
When the process X is predictable, we have seen that the stop times { in : n 1, i 1}
are predictable and thus here {⇠k : k 1} are predictable. Since
[⌧m+1 ] = [⇠m+1 ] \ ([m
j=1 [⌧j ])
c
it follows inductively that {⌧m } are also predictable. Predictability of X implies that
X is also predictable and then part (v) Theorem 8.4 now shows that ( X)⌧m are F⌧m
measurable
Remark 8.22. It is possible that in the construction given above P(⌧m = 1) = 1 for some
m.
Here is an observation.
Corollary 8.23. Let A be a (F⇧ )-predictable r.c.l.l. process with finite variation paths.
Let |A| = Var(A) denote the total variation of A. Then |A| is (F⇧ )-predictable.
Proof. As seen earlier, predictability of A implies that of A. Since ( |A|) = |( A)| it

follows that ( |A|) is predictable and hence it follows that |A| is predictable.
The following result is essentially proven above.
Lemma 8.24. Let H be an r.c.l.l. adapted process. Then H is predictable if and only if
( H) admits a representation
T
1
X
( H) = ( H)⌧m 1[⌧m ] (8.2.31)
m=1
where {⌧m : m
able. F
1} is a sequence of predictable stop times and ( H)⌧m is F⌧m
Proof. One part is proven in Theorem 8.21.For the other part, if H admits such a repre-
measur-
A
sentation then by Theorem 8.18, ( H) is predictable. Since H = H + ( H) and H is
predictable being left continuous, it follows that H is predictable.
The following result would show that an r.c.l.l. predictable process is locally bounded-
R
in a sense proving that since we can predict the jumps, we can stop just before a big jump.
Lemma 8.25. Let A be an r.c.l.l. predictable process with A0 = 0. Then for every n, the
D
stop time
⌧n = inf{t > 0 : |At | n or |At | n}
is predictable. As a consequence, A is locally bounded as a (F⇧+ )-adapted process.
Proof. We have shown in Lemma 2.40 that ⌧n is a stop time, ⌧n > 0 and if ⌧n < 1 then
|A⌧n | n or |A⌧n | n. Further, it follows that limn ⌧n = 1. Let
n
e : |At |
= {(t, !) 2 ⌦ n or |At | n}.
Since A is predictable and so is A (being l.c.r.l.), it follows that n 2 P and hence
[⌧n ] = [0, ⌧n ] \ n 2 P.
This shows ⌧n is predictable. For the second part, since ⌧n > 0, there exist (F⇧+ )-stop times
⌧n,m that increase to ⌧n strictly from below. Thus we can get mn such that ⌧n⇤ = ⌧n,mn
satisfies
P(⌧n⇤ < ⌧n ) = 1, P(⌧n⇤ ⌧n 2 n
)2 n
. (8.2.32)
Let n = max{⌧1⇤ , ⌧2⇤ , . . . , ⌧n⇤ }. Then { n n 1} are (F⇧+ )-stop times and
n n
P( n < ⌧n ) = 1, P( n  n+1 ) = 1, P( n ⌧n 2 )2 . (8.2.33)
Since ⌧n " 1, it follows that n " 1. And < ⌧n implies that |At |  n for t  n. Thus
A[ n ] is bounded (by n) and so A is locally bounded as a (F⇧+ )-adapted process.
Here is another important consequence of the preceding discussion on predictable stop

times.
T
Theorem 8.26. Let M be an r.c.l.l. martingale. If M is also predictable, then M has
continuous paths almost surely.
Proof. Let ⌧ be a bounded predictable stop time. Since M is also a (F⇧+ )-martingale as
seen in Lemma 8.13, by Theorem 8.15, we have F
E[( M )⌧ | F⌧+ ] = 0.
A
On the other hand, as seen in Theorem 8.4, part (v), M⌧ is F⌧+ measurable and thus so
is ( M )⌧ and so ( M )⌧ = 0 a.s. and hence we get M⌧ = M⌧ (a.s.). Now if is any
predictable stop time, ^ k is also predictable and hence we conclude
R
( M) ^k =0 a.s. 8k 1
and hence passing to the limit

D
( M) = 0 a.s.
By Theorem 8.21, the jumps of M can be covered by countably many predictable stop
times. This shows
P(( M )t = 0 8t) = 1
and hence paths of M are continuous almost surely.
By localizing, we can deduce the following:
Corollary 8.27. Let M be an r.c.l.l. (F⇧ ) local martingale. If M is also (F⇧ )-predictable,
then M has continuous paths almost surely.
Here is an interesting result.
Theorem 8.28. Let A be an r.c.l.l. (F⇧ )-predictable process with finite variation paths with
A0 = 0. If A is also a (F⇧ )-martingale, then
P(At = 0 8t) = 1. (8.2.34)
Proof. Theorem 8.26 implies that A is continuous. Now Theorem 4.67 implies
P([A, A]t = 0 8t) = 1.
Now part (v) of Theorem 5.16 and its Corollary 5.17 together imply that (8.2.34) is true.
Once again, we can localize and obtain the following
Corollary 8.29. Let A be an r.c.l.l. (F⇧ )-predictable process with finite variation paths
with A0 = 0. If A is also a (F⇧ ) local martingale, then
T
P(At = 0 8t) = 1.
8.3 Natural FV Processes are Predictable

F
The main result of this section is to show that a process A 2 V is natural if and only if
it is predictable. To achieve this, we need to consider the right continuous filtration (F⇧+ )
A
along with the given filtration.
Recall that we had observed in Corollary 4.4 that a (F⇧+ )-predictable process f such
that f0 is F0 measurable is (F⇧ )-predictable.
R
In his work on decomposition of submartingales, P. A. Meyer had introduced a notion

of Natural increasing process. It was an ad-hoc definition, given with the aim of showing
uniqueness in the Doob-Meyer decomposition.
D
Definition 8.30. Let A 2 V0 i.e. A isan adapted process with finite variation paths and
A0 = 0. Suppose |A| is locally integrable where |A|t = Var[0,t] (A). A is said to be Natural if
for all bounded r.c.l.l. martingales M
[M, A] is a local martingale. (8.3.1)
Let W = {V 2 V0 : |V | is locally integrable where |V |t = Var[0,t] (V )}.
Remark 8.31. Let A 2 V0 be such that [A, A] is locally integrable. Since [A, A] = ( A)2 ,
it follows that |( A)| is locally integrable and as a consequence A is locally integrable and thus
A 2 W.
8.3. Natural FV Processes are Predictable 259
Theorem 8.32. Let A 2 W be natural. Let n " 1 be such that |A|[ n ] is integrable. Then
[M, A[ n ] ] is a martingale for all bounded martingales M and n 1.
[ ]
Proof. Let An = A[ n ] . As seen in (4.6.9), [M, A]t n = [M, An ]t and since A is natural,
[M, An ]t is also a local martingale for all bounded martingales M . Invoking Theorem 4.67
we have
X
[M, An ]t = ( M ) s ( An ) s . (8.3.2)
0<st
Thus if the martingale M is bounded by a constant C, then

X
|[M, An ]t |  2C |( An )s |  2C|A|t^ n (8.3.3)
0<st
and by choice of n, E[|A|t^ n ] < 1. Thus
T
E[sup |[M, An ]s |]  2CE[|A|t^ n ] < 1.
st
Now Lemma 5.5 implies that the local martingale [M, An ] is indeed a martingale.
true and would be taken up subsequently.

F
We will first show that if A 2 W is predictable then it is natural. The converse is also
Theorem 8.33. Let A 2 W be predictable. Then A is natural.

A
Proof. Let M be a r.c.l.l. martingale bounded by C and let n " 1 be such that |A|[ n ] is
integrable. Let us write An = A[ n ] . Note that A predictable implies An is predictable for
R
all n. Fix n.
Predictability of An implies that ( An ) is predictable since (An ) is predictable being
l.c.r.l. adapted. Let {⌧m } be predictable stop times covering jumps of An as constructed
D
in Theorem 8.20. Now predictability of ( An ) and part (v) of Theorem 8.4 implies that
( An )⌧m is F⌧m measurable for all m 1. Since {⌧m } cover the jumps of An , it follows
from (8.3.2) that
X1
n
[M, A ]t = ( An )⌧m ( M )⌧m 1[⌧m ,1) (t). (8.3.4)
m=0
For each m, ⌧m as well as ( An ) ⌧m are F⌧m measurable by Theorem 8.4. Hence

E[( An )⌧m ( M )⌧m 1[⌧m ,1) (t)] = E[E[( An )⌧m ( M )⌧m 1[⌧m ,1) (t) | F⌧m ]]
= E[( An )⌧m 1[⌧m ,1) (t)E[( M )⌧m | F⌧m ]]
=0
as M is a martingale and ⌧m is predictable. Since M is bounded by 2C, we have

1
X 1
X
n
E[ |( M )⌧m ( A )⌧m |1[⌧m ,1) (t)]  2CE[ |( An⌧m )|1[⌧m ,1) (t)
m=1 m=1
 2C|An |t
< 1.
The dominated convergence theorem implies that the series in (8.3.4) converges in L1 (P)
and as a consequence, E[[M, An ]t ] = 0 for all t < 1.
Now given a bounded martingale N and bounded stop time say bounded by T , apply
this to N = M to get
E[[N, An ]T ] = E[[M, An ] ^T ] = E[[M, An ] ] = 0
which in turn proves that [N, An ]t is a martingale (see Theorem 2.53). Thus [N, A] is a
T
local martingale for every bounded martingale N and so A is natural.
Our next observation will play an important role in the converse that we will take up
later.
F
Lemma 8.34. Let A 2 W be natural. Then for all stop times ⌧ , ( A)⌧ is F⌧ measurable.
A
Proof. To see this, first let ⌧ be bounded, say by k and let U be any bounded F⌧ measurable
random variable and let
Wt = (U E[U | F⌧ )1[⌧,1) (t).
R
As seen in Theorem 8.4, part (vi), W is a martingale with r.c.l.l. paths. Since W is bounded
and A is natural
[W, A]t = ( A)⌧ (U E[U | F⌧ ])1[⌧,1) (t)
D
is a local martingale.
Let n " 1 be stop times such that |A| n is integrable for all n. As seen in Theorem
8.32, [W, A[ n ] is a martingale and since ⌧  k we have E[[W, A[ n ] ]k ] = 0. Thus
E[( A[ n]
)⌧ U ] = E[( A[ n]
)⌧ E[U | F⌧ ]]
for all bounded F⌧ measurable random variables U . Thus by Lemma 5.42, it follows that
( A[ n ] )⌧ is F⌧ measurable. Since n " 1, we conclude that A⌧ is F⌧ measurable.
For a general stop time ⌧ , noting that
( A)⌧ = lim ( A)⌧ ^n 1{⌧ <1}

n!1
it follows that
( A)⌧ is F⌧ measurable. (8.3.5)
Next we will show that if A is natural for (F⇧ ) then it is so for (F⇧+ ) filtration as well.
Theorem 8.35. Let A be an (F⇧ ) adapted r.c.l.l. process with finite variation paths such
that A0 = 0 and |A| is locally integrable where |A|t = Var[0,t] (A). Suppose that A is natural
for the filtration (F⇧ ). Then it is also natural for the filtration (F⇧+ ).
Proof. Let n " 1 be such that |A|[ n ] is integrable and let An = A[ n ] . Let us fix a
(F⇧+ )-martingale N bounded by C with r.c.l.l. paths. To show [N, A] is a local martingale,
we will prove that for all n
T
[N, An ] is a (F⇧+ )-martingale. (8.3.6)
We divide the proof in steps.
Step 1:. We will first prove that for r 0 fixed,
is a (F⇧+ )-martingale and [U, An ] is given by

F
U = ( N )r 1[r,1) (t) (8.3.7)
A
[U, An ]t = ( N )r ( An )r 1[r,1) (t). (8.3.8)
is a (F⇧+ )-martingale.
To see this, note that E[( N )r | Fr+ ] = 0 as N is a (F⇧+ )-martingale. The process
R
U has a single jump at t = r and thus U is also a (F⇧+ )-martingale and (8.3.8) is true.
Invoking Lemma 8.34 we observe that
( An )r is Fr ✓ Fr+ measurable. (8.3.9)
D
As a consequence
E[( [U, An ])r | Fr+ ] = E[( N )r ( An )r | Fr+ ]
= ( An )r E[( N )r | Fr+ ] (8.3.10)
=0
and thus [U, An ] is a (F⇧+ )-martingale. This completes Step 1.
Step 2: Let D = {t 2 [0, 1) : P(( N )t 6= 0) > 0}. Then D is countable.
To see this, for t 0 let h(t) = E[ [N, N ]t ]. Then h is an [0, 1)-valued increasing
function since N is a bounded martingale. Since (h(t) h(t ) = E[ [N, N ]t [N, N ]t ] =
E[(( N )t )2 ], it follows that t is a continuity point of h if and only if P(( N )t 6= 0) = 0.

Thus D is precisely the set of discontinuity points of h which is countable. This completes
Step 2.
Let t1 , t2 , . . . tm . . . be an enumeration of D. Let us write
m
X
Ztm = ( N )tk 1[tk ,1) (t)
k=1
and M m = N Z m . Then Z m and [Z m , An ] are (F⇧+ )-martingales as seen in Step 1. Note

that
m
X
[Z m , An ]t = ( N )tk ( An )tk 1[tk ,1) (t). (8.3.11)
k=1
From the definition of Z m , M m it follows that
T
{t : P[( M m )t 6= 0] > 0} = {tk : k (n + 1)}. (8.3.12)
Next we will prove

Step 3: Z m converges to a (F⇧+ )-martingale Z in the Emery topology and [Z, An ] is a
(F⇧+ )-martingale for each n 1.
To see this, for j < m we have
Fm
X
A
[Z m Zj, Zm Z j ]t = (( N )tk )2 1[tk ,1) (t).
k=j+1
Since N is a bounded martingale, it is square integrable and thus

1
R
X
E[ (( N )tk )2 1[tk ,1) (t)]  E[[N, N ]t ] < 1.
k=1
It follows that E[[Z m Zj, Zm

Z j ]t ] ! 0 for all t < 1 as j, m ! 1. Hence using Lemma
D
5.35, we conclude that Z m converges to a (F⇧+ )-martingale Z such that
E[[Z m Z, Z m Z]t ] ! 0 for all t < 1 (8.3.13)
and
em
Z m ! Z. (8.3.14)
Let us note that since N is bounded by C we have

1
X 1
X
n
|( N )t ( A )t |1[tk ,1) (t)  2C |( An )t |1[tk ,1) (t)
k=1 k=1 (8.3.15)
n
 2C|A |t
Let V n be defined by
1
X
Vtn = ( N )tk ( An )tk 1[tk ,1) (t). (8.3.16)
k=1
The series defining V n converges almost surely and in L1 (P) in view of (8.3.15). Then
1
X
E[ |Vtn m n
[Z , A ]t | ]  1[tk ,1) (t)E[ |( N )tk ( An )tk | ]
k=m+1 (8.3.17)
! 0 as n ! 1
in view of (8.3.15). Since [Z m , An ] is a (F⇧+ )-martingale, (8.3.17) implies that V n is a
(F⇧+ )-martingale. On the other hand (8.3.14) implies that
[Z m , An ] ! [Z, An ] as m ! 1
in the Emery topology (see Theorem 4.103). Thus V n = [Z, An ] is a (F⇧+ )-martingale.
T
This completes Step 3.
em
Since M m = N Z m , we get M m ! M where M = N Z is also a (F⇧+ )-martingale.
ucp
Also, M m ! M . It then follows from (8.3.12) that
F
P[( M )t 6= 0] = 0 8t 0.
This observation (8.3.18) and the assumption that F0 contains all P null sets together
(8.3.18)
A
imply that Mt is Ft+ measurable. Since Ft+ ✓ Ft ✓ Ft+ , we conclude that M is a
(F⇧ )-martingale. In view of the assumption on M , we conclude that [M, A] is a (F⇧ )-local
martingale. The process [M, A] is r.c.l.l. and thus is also a (F⇧+ )-local martingale.
R
Since N = M +Z, [N, A] = [M, A]+[Z, A]. We have already shown in Step 3 that [Z, A]
is a (F⇧+ )-local martingale and thus it follows that [N, A] is a (F⇧+ )-local martingale.
We now come to one of the main results of this chapter.

D
Theorem 8.36. Let B 2 W be a natural (for the filtration (F⇧ ) ) i.e. for all bounded
(F⇧ )-martingales M
[M, B] is a local martingale. (8.3.19)
Then B is (F⇧ )-predictable.
Proof. Let ⌧m " 1 be stop times such that B m = B [⌧m ] satisfies |B m |t is integrable for all
m, t. Suffices to prove that for all m, B m is predictable. So fix m 1 and let us write
A = B m . As seen in Theorem 8.32, for all bounded martingales M ,
[M, A] is a martingale. (8.3.20)
By Theorem 8.35, (8.3.20) is true for all bounded (F⇧+ )-martingales M .

Let { in : n 1, i 0} be the stop times defined by (8.2.25). We are going to prove
that each of these is predictable. Note that (8.2.26) can be re-written as
X1
( A)1{| A| 1 } = ( A) in 1[ in ] . (8.3.21)
n
i=0
It follows from Lemma 8.34 that
Win = ( A) n
i
is F n
i
measurable. (8.3.22)
Invoking part (vi) of Theorem 8.4, we obtain predictable processes f n,i such that
f n,i
n 1{ n
i <1}
= W n,i 1{ n
i <1}
.
i
Let
1
X
gn = f n,i 1( n n
i 1, i ]
.
i=1
T
Then g n is predictable since f n,i is predictable and 1( n n
i 1, i ]
is l.c.r.l. adapted process and
hence predictable. Further, note that by definition
g nin = ( A) in .
In view of the definition of { n
i}
n
g 1{| A| 1
n
}
F
as seen in (8.2.26), it follows that
= ( A)1{| A| 1
n
} . (8.3.23)
A
In particular, for all m n
g n 1{| A| n 1
m
} = g 1{| A| 1
}
n
and hence defining g = lim supn!1 g n , it follows that

R
g 1{| A|>0} = ( A)1{| A|>0} . (8.3.24)

Now fix m 1 and let hm = 1{|g|>0} g 11
{| A| 1
} . Then h is bounded predictable and
m
m
( A)h = 1{| 1 . (8.3.25)
D
A| }
m
R
Now given a bounded (F⇧+ )-martingale M with M0 = 0, let = Since hm Nm hm dM .
is bounded predictable and M is bounded (F⇧+ )-martingale, N m is also a (F⇧+ )-martingale
and thus [N m , A] is a (F⇧+ )-martingale. On the other hand
Z t X
m
[N , A]t = hm d[M, A] = hm
s ( M )s ( A)s
0 0st
X
= ( M )s 1{|( A)s | 1
}
m
0st
X1
= ( M) m
j ^t
.
j=0
8.4. Decomposition of Semimartingales revisited 265
Since [N m , A] is a martingale, E[[N m , A] m

k ^t
] = 0 for all k. Thus
k
X
E[ ( M) m
j ^t
]=0
j=0
for all k and hence for all m 1, i 1 and t < 1

E[( M ) m
i ^t
] = 0. (8.3.26)
Since (8.3.26) holds for all bounded (F⇧+ )-martingales M with M0 = 0, invoking Theorem
8.15 we conclude that for all m 1, i 1 and t < 1, the bounded stop time im ^ t is
(F⇧+ )-predictable.
Since [ im ] = \k [ im ^ k], it follows that im is (F⇧+ )-predictable for every m, i. This
along with the observation (8.3.22) gives us
( A) in 1[
T
n
i ]
is (F⇧+ )-predictable for each n, i. As a consequence

1
X
n
⇠ = ( A) in 1[ n
i ]
i=0
F
is (F⇧+ )-predictable. It can be seen using (8.3.21) that
lim ⇠ n = A
A
n!1
and thus A is (F⇧+ )-predictable. Since

At = At + ( A)t
R
and since At is (F⇧+ )-predictable, being an l.c.r.l. adapted process, we conclude that A
is (F⇧+ )-predictable. Since B 2 W, it follows that B0 = A0 = 0 and then Corollary 4.4
implies that A is (F⇧ )-predictable.
D
8.4 Decomposition of Semimartingales revisited

In view of this identification of Natural FV processes as predictable, we can recast Theorem
5.43 as follows.
(ii) E[supsT |Xs | ] < 1,

(iii) E[[X, X]T ] < 1.

X = M + A, M 2 M2 , A 2 V, A0 = 0 and A is predictable. (8.4.1)
Further, the decomposition (8.4.1) is unique.
Proof. Let X = M + A be the decomposition in Theorem 5.43. As seen in Corollary 5.44,

the process A satisfies At = At^T . Since E[[M, A]T ] = 0, we have
E[[X, X]T ] = E[[M, M ]T ] + E[[A, A]T ]
and hence E[[A, A]T ] < 1 and so A 2 W. Thus A satisfies conditions of Theorem 8.36
and hence A is predictable. For uniqueness, if X = N + B is another decomposition with
N 2 M2 and B 2 V and B being predictable, then M N = B A is a predictable process
T
with finite variation paths which is also a martingale and hence by Theorem 8.28, M = N
and B = A.
Remark 8.38. We note that in Theorem 8.37 we have not assumed that the underlying
filtration is right continuous. F
We need two more results before we can deduce the Doob-Meyer decomposition result.
A
First, we need to extend Theorem 8.37 to all locally integrable semimartingales. Then
we need to show that when X is a submartingale, then the FV process appearing in the
decomposition is an increasing process. We begin with the second result.
R
Theorem 8.39. Let U be an r.c.l.l. (F⇧ )-predictable process with finite variation paths with
U0 = 0 and
E[Var[0,T ] (U )] < 1 for all T < 1. (8.4.2)
D
If U is also a (F⇧ ) submartingale, then U is an increasing process, i.e.

P(Ut Us 8 0  s  t < 1) = 1. (8.4.3)
Proof. Let V = |U | denote the total variation process of U (Vt = Var[0,t] (U )). As seen in
Corollary 8.23, V is also predictable and of course, V is an increasing process. Fix T < 1
and define measures µ and on (⌦, e P) as follows. For a bounded predictable process f
Z Z T
f dµ = E[ fs dUs ] (8.4.4)
0
Z Z T
f d = E[ fs dVs ]. (8.4.5)
0
Since V is an increasing process, is a positive finite measure. We shall show that µ is

also a positive measure. Note that if f = a1(s1 ,s2 ] with a being Fs1 measurable, a 0,
s1 < s2  T then
Z Z T
f dµ = E[ fs dUs ]
0
= E[a(Us2 Us1 )]
= E[aE[(Us2 Us1 ) | Fs1 ]]
0
as E[(Us2 Us1 ) | Fs1 ] 0 a.s. since U is a submartingale and a 0. Since a simple
predictable process is a linear combination of such functions, it follows that for a simple
R
predictable f given by (4.2.1) such that f 0, f dµ 0. Since such functions generate
R
the predictable -field, it follows that f dµ 0 for all bounded predictable processes
T
f 0 and thus µ is a positive measure. If f is a non-negative bounded predictable process,
then Z Z
T T
| fs dUs |  fs dVs
and thus for such an f ,

0
Z
f dµ 
FZ
0
fd .
A
Thus µ is absolutely continuous w.r.t. and thus denoting the Radon-Nikodym derivative
by ⇠, it follows that ⇠ is a [0, 1)-valued predictable process such that
Z Z
R
f dµ = f ⇠ d . (8.4.6)
Let us define a process B by

Z t
D
Bt (!) = 1[0,T ] (s)⇠s (!)dVs (!). (8.4.7)

0
Since ⇠ is a [0, 1)-valued and V is an r.c.l.l. increasing process, it follows that B is increasing
as well. Since ⇠ and V are (F⇧ ) adapted, it follows that B is also (F⇧ ) adapted. Further,
let us note that
( B) = ⇠( V ) (8.4.8)
and hence predictability of V implies that ( V ) and as a consequence ( B) is predictable.

Since B = B + ( B), and B is l.c.r.l. and hence predictable, it follows that B is
predictable. Let C = B U . Then C is a predictable process with finite variation paths
and C0 = 0.
We will show that C is a martingale. For this, using (8.4.6) and (8.4.7), we have for
any bounded predictable f
Z T Z T
E[ fs dBs ] =E[ fs ⇠s dVs ]
0 Z 0
= f⇠d (8.4.9)
Z
= f dµ.
Using (8.4.4) and (8.4.9) and recalling that C = B U we conclude that for bounded
predictable processes f we have
Z T
E[ fs dCs ] = 0.
0
Taking f = a1(s1 ,s2 ] with a being Fs1 measurable, s1 < s2  T , we conclude
T
E[a((Cs2 Cs1 )] = 0.
This implies C is a martingale (since this is true for all T < 1).
By Theorem 8.28, it follows that C = 0 and as a consequence, U = B. Since by
F
construction, B is an increasing process, this completes the proof.
The preceding result also contains the proof of the following:

A
Corollary 8.40. Let U be an r.c.l.l. (F⇧ )-predictable process with finite variation paths
with U0 = 0 such that (8.4.2) is true. Let V = |U | denote the total variation process of U
( Vt = Var[0,t] (U ) ). Then there exists a predictable process ⇠ such that |⇠| = 1 and
R
Z t
Ut = ⇠s dVs . (8.4.10)
0
Here are some auxiliary results.
D
Lemma 8.41. Let M be a local martingale. Then M is locally integrable.

n]
Proof. Let n be stop times increasing to 1 such that M [ is a martingale. Let ↵n be
the stop times defined by
↵n = inf{t 0 : |Mt | n or |Mt | n}
and let ⌧n = ↵n ^ n ^ n. Let M n = M [⌧n ] . Then M n is a martingale and for any T < 1
sup |Mt |  n + |M⌧n | = n + |Mnn |.
0t⌧n
Since E[Mnn ] < 1, it follows that M is locally integrable.

Lemma 8.42. Let ⌧ be a stop time and let ⇣ be a F⌧ measurable [0, 1)-valued integrable
random variable. Let
Xt = ⇣ 1[⌧,1) (t).
X = M + A, M 2 M, A 2 V+ ; A is predictable. (8.4.11)
The decomposition (8.4.11) is unique. Further, for all T < 1,
E[AT ]  E[⇣] (8.4.12)
E[ |MT | ]  2E[⇣]. (8.4.13)
Proof. Let ⇣ m = ⇣ 1{⇣m} and X m = ⇣ m 1[⌧,1) (t). Then, X m is bounded FV processes and
hence a stochastic integrator. Thus by Theorem 8.37, it admits a decomposition
T
X m = M m + Am , M m 2 M 2 , A m m
0 = 0 and A is predictable.
Also, ⇣ m 0 implies that X m is a submartingale. Since M m is a martingale, it follows

that Am is a submartingale and hence by Theorem 8.39, Am is an increasing process.
Further, for m > n
Xm Xn = M m
F
M n + Am An , M m 2 M 2 ,
A
Am n
0 = A0 = 0 and A
m
An is predictable.
Moreover, X m X n is a submartingale. As a consequence, Am An is an increasing process
in view of Theorem 8.39. Thus
R
P(Am
t Ant 8t) = 1.
Thus defining
At (!) = lim sup Ant (!)
D
n!1
it follows that A is an increasing process. Since An is predictable, so is A and of course,
A0 = 0. Let M = X A. We will now show that M is a martingale.
Note that X0m X0n = 0 implies that M0m M0n = 0 and hence E[Mtm Mtn ] = 0. As
a consequence for n  m
E[Am
t Ant ] = E[Xtm Xtn ] = E[⇣ 1[⌧,1) (t)1{n<⇣m} ].
Since Amt Ant is non negative (being an increasing process that is zero at t = 0), it follows
that for each t,
E[ |Am
t Ant | ]  E[⇣ 1{n<⇣m} ].
Since ⇣ is an integrable random variable, it follows that for all t

E[ |At Ant | ] = E[⇣ 1{n<⇣} ] ! 0 as n ! 1.
Since
E[ |Xtn Xt | ] ! 0 as n ! 1
it follows that (note M m = X m Am , M = X A)
E[ |Mtn Mt | ] ! 0 as n ! 1.
For m 1, M m is a martingale and hence by Theorem 2.21 M is a martingale. The
uniqueness of the decomposition follows from Theorem 8.28. Note that A0 = 0 implies
M0 = ⇣ 1{⌧ =0} and hence E[MT ] = E[M0 ] 0. Thus,
E[AT ] = E[XT ] E[MT ]  E[XT ]  E[⇣]
This proves (8.4.12). For (8.4.13), note that |MT |  XT + AT and hence
T
E[ |MT | ]  E[AT ] + E[XT ]  2E[⇣].
F
Corollary 8.43. Let ⌧n be a sequence of stop times and let ⇣n be a sequence of [0, 1)-
valued random variables, with ⇣n being F⌧n measurable and
X1
A
E[⇣n ] < 1. (8.4.14)
n=1
Let
1
X
Zt = ⇣n 1[⌧n ,1) . (8.4.15)
R
n=1
Then there exists a unique predictable increasing process B with B0 = 0 and a martingale
N such that
D
Z = N + B.
Proof. Let Xtn = ⇣n 1[⌧n ,1) and let An be the predictable increasing process with An0 = 0
given by Lemma 8.42 such that Mtn = Xtn Ant is a martingale. Then as seen in Lemma
8.42 we have
E[AnT ]  E[⇣n ]
P
and hence the assumption (8.4.14) implies that Bt = 1 n
n=1 At defines a integrable pre-
Pk
dictable process. Further n=1 Mtn converges in L1 (P) to Nt = Zt Bt . By Theorem 2.21
N is a martingale. This proves existence part. The uniqueness again follows from Theorem
8.28.
We can now extend the decomposition of semimartingales where the FV process is

predictable to a wider class of semimartingales.
Theorem 8.44. Let X be a semimartingale that is locally integrable. Then X admits a

decomposition
X = M + A, M 2 Mloc , A 2 V, A0 = 0 and A is predictable. (8.4.16)
The decomposition as in (8.4.16) is unique and the process A is called the compensator of
the semimartingale X. Conversely, if a semimartingale X admits a decomposition (8.4.16),
then X is locally integrable.
Proof. Let n be stop times increasing to 1 such that

sup |Xt | is integrable. (8.4.17)
0t n
T
Let ↵n be the stop times defined by
↵n = inf{t 0 : |Xt | n or |Xt | n} (8.4.18)
and let ⌧n = ↵n ^ n ^ n. Let X n = X [⌧n ] , ⇠ n = ( X)⌧n , U n = (⇠ n )+ 1[⌧n ,1) , V n =
(⇠ n ) 1[⌧n ,1) and Z n = X n U n + V n . Then
8
<X
t
F
if t < ⌧n
A
Ztn =
:X if t ⌧n .
⌧n
Hence Z n is a bounded semimartingale. Thus by Theorem 8.37, Z n admits a decomposition

as in (8.4.11). In view of (8.4.17) (⇠ n )+ and (⇠ n ) are integrable and hence by Lemma 8.42,
R
U n , V n also admit decomposition as in (8.4.11). Thus X n also admits a decomposition

X n = M n + An (8.4.19)
D
with An0 = 0, An being a predictable FV process. For n < m,

Xtn = Xtm for t  ⌧n
The uniqueness of the decomposition (8.4.11) then shows that
Mtn = Mtm , Ant = Am
t for t  ⌧n .
Thus defining Mt = limn Mtn and At = limn Ant , it follows that

Mt = Mtn , At = Ant for t  ⌧n .
Thus M is a local martingale and A is a predictable process with finite variation paths
with A0 = 0 and by construction, X = M + A. Thus a decomposition as in (8.4.16) exists.
On the other hand if a semimartingale X admits a decomposition (8.4.16), then A being a

predictable FV process is locally bounded (see Lemma 8.25) and hence locally integrable
and M being a local martingale is locally integrable (see Lemma 8.41).
The uniqueness part follows from Corollary 8.29.
Remark 8.45. A locally integrable semimartingale is called a Special Semimartingale. The

previous result says that a semimartingale admits a decomposition as in (8.4.16) if and only if
it is special.
Exercise 8.46. Let X be a semimartingale such that X0 = 0 and
|( X)|  a
for a constant a. Show that X is locally integrable. Further, if X = M + A is the canonical
T
decomposition with M 2 Mloc ,A 2 V, A0 = 0 and A predictable. Show that
|( A)|  a.
stop time ⌧ ,
F
Hint: If ↵n are defined by (8.4.18), then X [↵n ] are bounded. Observe that for any predictable
( A[↵n ] )⌧ = E[( A[↵n ] )⌧ | F⌧ ].

A
When M, N are local martingales such that the quadratic variation process [M, N ]
is locally integrable, then the unique predictable process A 2 V such that A0 = 0 and
R
[M, N ]t At is a local martingale (in other words the process A appearing in the decom-
position (8.4.16)) is denoted by hM, N i.
Definition 8.47. For local martingales M, N such that [M, N ] is locally integrable, the
D
predictable cross quadratic variation hM, N i is the unique predictable process with FV paths
which is zero at t = 0 and such that
[M, N ]t hM, N it
is a local martingale. When M = N , (and M is locally square integrable) then hM, M i is

called the predictable quadratic variation of M .
It is easy to see that (M, N ) 7! hM, N i is bilinear. And when M, N are locally square
integrable, [M, N ] is locally integrable and hence the predictable quadratic variation hM, N i
is defined.
8.5. Doob-Meyer Decomposition 273
8.5 Doob-Meyer Decomposition

As was mentioned earlier, the Doob-Meyer decomposition was the starting point of the
theory of stochastic integration. For a square integrable martingale M , the Doob-Meyer
decomposition of the submartingale M 2 gives an increasing process hM, M i (also called the
predictable quadratic variation of M ) which gave an estimate on the growth of stochastic
integration w.r.t. M . In this book, we have developed the theory of stochastic integration
via quadratic variation [M, M ]. Nonetheless, the predictable quadratic variation of a (lo-
cally) square integrable martingale M plays an important role in the theory and now we
will show existence of hM, M i. We start with an auxiliary result.
Lemma 8.48. Let A be an adapted increasing integrable process with A0 = 0 and let U be
a predictable process, U 2 V such that M = A U is a martingale. Then U 2 V+ , i.e. U
T
is an increasing process.
Proof. Let {⌧m : m 2 F } be the sequence of stop times given by Theorem 8.21 (F is a
subset of natural numbers) so that (8.2.27) and (8.2.28) are true. Let
Ct =
X
m2F
F
( A)⌧m 1[⌧m ,1)
A
and
D t = At Ct .
It follows that C and D are adapted increasing processes, C0 = 0, D0 = 0 and D is

R
continuous. Since
0  Ct  At 8t
it follows that C is also integrable and thus by Corollary 8.43 we can get a predictable
D
increasing process B such that Nt = Ct Bt is a martingale. Thus Nt = At Dt Bt .

Thus N M = U D B. Now N M is a martingale and at the same time U D B
is an FV process that is predictable. Thus by Theorem 8.28, we have
U = D + B.
By construction, D and B are increasing processes and this shows U is increasing.
Corollary 8.49. Let M be a locally square integrable martingale. Then the predictable
quadratic variation hM, M i (defined in Definition 8.47 ) is an increasing process.
Proof. The result follows from Lemma 8.48 since [M, M ] is an increasing process.
We are now ready to prove the classical result.
Theorem 8.50. The Doob-Meyer Decomposition Theorem Let N be a locally square

integrable martingale with N0 = 0 w.r.t. a filtration (F⇧ ). Then hN, N i is the unique (F⇧ )
r.c.l.l. predictable increasing process A such that A0 = 0 and M defined by
Mt = Nt2 At (8.5.1)
is a local martingale. Further, for any stop time
E[ hN, N i ]  E[ sup |Ns |2 ]  4E[ hN, N i ]. (8.5.2)
0s
Proof. Since Nt2 [N, N ]t is a local martingale (see Theorem 5.16), for a predictable process
A, N 2 A is a local martingale if and only if [N, N ] A is a local martingale. Now the
T
first part follows from Corollary 8.49.
For the remaining part, let ⌧n be a localizing sequence for the local martingale M =
N 2 hN, N i. Then for n 1
Ytn = N⌧2n ^t
is a martingale. Hence for any bounded stop time
F hN, N i⌧n ^t
we have,
A
E[N⌧2n ^ ] = E[hN, N i⌧n ^ ] (8.5.3)
Now Doob’s maximal inequality, Theorem 2.24, we get
R
E[hN, N i⌧n ^ ]  E[ sup |Ns |2 ]  4E[hN, N i⌧n ^ ].

0s⌧n ^
Now taking limit as n ! 1 and using monotone convergence theorem, we conclude

E[hN, N i ]  E[ sup |Ns |2 ]  4E[hN, N i ]. (8.5.4)
D
0s
Remark 8.51. Using (8.5.3), it follows that if N is a locally square integrable martingale
then for all stop times ,
E[ [N, N ] ] = E[N 2 ] = E[hN, N i ]. (8.5.5)
All the quantities can be 1, but if one is finite, so are the others and they are equal.
The process hN, N i is now known as the predictable quadratic variation of the (locally)
square integrable martingale N .
Lemma 8.52. Let M be a locally square integrable martingale and let f be a predictable
process such that Z t
Bt = |fs |2 dhM, M is < 1 a.s. (8.5.6)
0
Then B is a predictable increasing process.
Proof. Let us note that B is an r.c.l.l. increasing adapted process and for any stop time ⌧ ,
( B)⌧ = |f⌧ |2 ( hM, M i)⌧ .
Now the result follows from Lemma 8.24 and part (v) of Theorem 8.4.
Lemma 8.53. Let M be a locally square integrable martingale and let f be a locally bounded
R
predictable process and let N = f dM . Then
Z t
hN, N it = |fs |2 dhM, M is < 1. (8.5.7)
T
0
Proof. That Bt defined by (8.5.6) is predictable has been noted above. One can show that
Nt2 Bt is a local martingale staring with f simple and then by approximation. Thus
hN, N it = Bt .
F
Remark 8.54. For f, M, N as above, we have seen that
Z t
A
[N, N ]t = |fs |2 d[M, M ]s < 1 (8.5.8)
0
and hence it follows that for a stop time ,
Z Z
2
E[ |fs | dhM, M is ] = E[ |fs |2 d[M, M ]s ]. (8.5.9)
R
0 0
The estimate (5.4.10) on the growth of the stochastic integral can be recast as :
Theorem 8.55. Let M be a locally square integrable martingale with M0 = 0. For a locally
D
Rt Rt 2
bounded predictable process f , the processes Yt = 0 f dM and Zt = Yt2 0 fs dhM, M is
R 2
are local martingales and for any stop time such that E[ 0 fs dhM, M is ] < 1,
Z t Z
2
E[ sup | f dM | ]  4E[ fs2 dhM, M is ], 8T < 1. (8.5.10)
0t 0 0
For locally square integrable martingales M, N , the predictable cross-quadratic variation

hM, N i is the unique predictable process in V0 such that [M, N ]t hM, N it is a local
martingale. Since Mt Nt [M, N ]t is a local martingale, it follows that hM, N i is the
unique predictable process in V0 such that
Z t = Mt N t hM, N it (8.5.11)
is a local martingale. We can see that the predictable cross quadratic variation also satisfies
the polarization identity (for locally square integrable martingales M, N )
1
hM, N it = (hM + N, M + N it hM N, M N it ) (8.5.12)
4
We had seen that (M, N ) 7! hM, N i is bilinear in M and N . This yields an analogue of
Theorem 4.69 which we note here.
Theorem 8.56. Let M, N be locally square integrable martingales. Then for any s  t
p
Var(s,t] (hM, N i)  (hM, M it hM, M is ).(hN, N it hN, N is ) (8.5.13)
and
p
Var[0,t] (hM, N i)  hM, M it hN, N it , (8.5.14)
Proof. Let
T
⌦a,b,s,r = {! 2 ⌦ : haM + bN, aM + bN ir (!) haM + bN, aM + bN is (!)}
and
⌦0 = [{⌦a,b,s,r : s, r, a, b 2 Q, r s}.
F
Then it follows that P(⌦0 ) = 1 (since for any locally square integrable martingale Z, hZ, Zi
is an increasing process) and that for ! 2 ⌦0 , for 0  s  r, s, r, a, b 2 Q
A
(a2 (hM, M ir hM, M is ) + b2 (hN, N ir hN, N is )
+ 2ab(hM, N ir hM, N is ))(!) 0,
and since the quadratic form above remains positive, we conclude
R
|(hM, N ir (!) hM, N is (!))|

p (8.5.15)
 (hM, M ir (!) hM, M is (!))(hN, N ir (!) hN, N is (!)).
Since all the process occurring in (8.5.15) are r.c.l.l., it follows that (8.5.15) is true for all
D
s  r, s, r 2 [0, 1). Now given s < t and s = t0 < t1 < . . . < tm = t, we have
m
X1
|hM, N itj+1 hM, N itj |
j=0
X1 q
m
(8.5.16)
 (hM, M itj+1 hM, M itj )(hN, N itj+1 hN, N itj )
j=0
p
 (hM, M it hM, M is )(hN, N it hN, N is )
where the last step follows from Cauchy-Schwarz inequality since hM, M i, hN, N i are in-
creasing processes. Now taking supremum over partitions of [0, t] in (8.5.16) we get (8.5.13).
Now (8.5.14) follows from (8.5.13) taking s = 0 since hM, M i0 = 0, hN, N i0 = 0 and
hM, N i0 = 0.
And here is an anlaogue of 4.69. However, the proof is di↵erent from that given earlier.
Lemma 8.57. Let U, V be locally square integrable martingales. Then for any t we have
p
|hU, U it hV, V it |  2hU V, U V it (hU, U it + hV, V it ). (8.5.17)
Proof. Using bilinearity of (M, N ) 7! hM, N i, note that

hU, U it hV, V it = hU + V, U V it . (8.5.18)
Now (8.5.18) follows from (8.5.13) taking s = 0.
Using Lemma 8.24, one can show that if A is a predictable r.c.l.l. FV process and f is
a [0, 1)-valued predictable process, then B defined by
T
Z t
Bt = fs dAs
0
is predictable. It can be checked (first for simple integrands and then by limiting arguments)
X = f dM and Y = gdN ,
R
Z t
F
that for f, g predictable and locally bounded, M, N locally square integrable martingales,
R
A
U t = Xt Yt f gdhM, N i
0
is a local martingale. Thus
Z Z Z
R
h f dM, gdN i = f gdhM, N i. (8.5.19)
These observations lead us to the following analogue of Theorem 5.26 which we record here
for use later.
D
Theorem 8.58. Let M 2 M2loc ( i.e. M be a locally square integrable martingale) with
M0 = 0. Then for a locally bounded predictable process f and for any stop time such
R
that E[ 0 fs2 dhM, M is ] < 1,
Z t Z
E[ sup | f dM |2 ]  4E[ fs2 dhM, M is ], 8T < 1. (8.5.20)
0t 0 0
R
Proof. We had observed that ZY = f dM is a local martingale above and that
Z t
hY, Y it = fs2 dhM, M is .
0
Now the estimate (8.5.20) follows from (8.5.2).
Definition 8.59. Two locally square integrable martingales M, N are said to be strongly
orthogonal if hM, N it = 0 for all t < 1.
Equivalently, M, N are strongly orthogonal if Zt = Mt Nt is a local martingale. The fol-

lowing interesting observation is due to Kunita-Watanabe who studied structure of square
integrable martingales.
Theorem 8.60. Let M, N be locally square integrable martingales. Then N admits a

decomposition Z t
Nt = f dM + Ut (8.5.21)
0
where f 2 L2m (M ) and U is a square integrable local martingale strongly orthogonal to M .
Proof. Let ⌧n be a sequence of stop times, ⌧n  n, such that Nt^⌧n is a square integrable
T
2
martingale. Let an = E[Nt^⌧ ]. Let
n
P R ⌧n
↵ = inf{ 1 1
n=1 2n (1+an ) E[(N⌧n 0 gdM ) ] : g 2 Lm (M )}.
2 2
F
It can be seen that ↵ < 1, indeed, ↵  1 since g = 0 2 L2m (M ). Now it can be shown
(proceeding as in the proof of existence of orthogonal projections onto a closed subspace
in a Hilbert space and in the proof of Theorem 5.37) that the infimum is attained, say for
A
f 2 L2m (M ) and then for every n
Z ⌧n Z ⌧n
E[(N⌧n f dM )( gdM )] = 0 8g 2 L2m (M ).
0 0
R
Thus defining U by (8.5.21), we have

Z ⌧n
E[U⌧n ( gdM ) = 0 8g 2 L2m (M ).
0
D
Given a stop time , taking g = 1[0, ] , this yields
E[U⌧n N ^⌧n ] =0
which in turn yields

E[U ^⌧n N ^⌧n ] = 0.
Writing Zt = Ut Nt , we conclude that Ztn = Zt^⌧n is a martingale and thus Z is a local

martingale completing the proof.
For N, M 2 Mloc , if [M, N ] = 0 then it follows that M N is a local martingale and

hence hM, N i = 0. This observation has an important consequence.
Lemma 8.61. Let N 2 V \ M2loc and M 2 M2loc be such that for all stop times ⌧ ,
( N )⌧ ( M )⌧ = 0 a.s.
Then hM, N i = 0.
Proof. As seen in Theorem 4.67, N 2 V implies

X
[M, N ]t = ( M )s ( N )s .
0<st
Using Theorem 8.21, we can get stop times {⌧n : n 2 F } (F is a finite or countable set)
that cover the jumps of N and then it follows that
X
[M, N ]t = ( M )⌧m ( N )⌧m 1{⌧m t} .
n2F
Now in view of the assumption, ( M )⌧m ( N )⌧m = 0 (a.s.) for each m and as a con-
T
sequence, [M, N ]t = 0 (a.s.) for all t. Thus Zt = Mt Nt is a local martingale and as a
consequence hM, N i = 0.
8.6 Square Integrable Martingales F

In this section we will obtain a decomposition of square integrable martingales into a
A
martingale with continuous paths and a martingale with jumps.
The following simple result plays an important role in the decomposition.
Theorem 8.62. Let ⌧ be a predictable stop time and let ⇠ be a F⌧ measurable square
R
integrable random variable with E[⇠ | F⌧ ] = 0. Then

Mt = ⇠ 1[⌧,1) (t) (8.6.1)
D
is a martingale and hM, M i = A where

At = E[⇠ 2 | F⌧ ]1[⌧,1) (t). (8.6.2)
Proof. From part (vii) in Theorem 8.4 it follows that M is a martingale. Since ⌧ is
predictable, by Theorem 8.18 it follows that A is predictable and clearly A is an increasing
process. Noting that
Mt2 At = (⇠ 2 E[⇠ 2 | F⌧ ])1[⌧,1) (t)
it follows, again invoking part (vii) in Theorem 8.4, that Nt = Mt2 At is a martingale.
It is clear from the definition of A that A0 = 0 on the set ⌧ > 0. On the other hand,
⇠ is F⌧ measurable and hence ⇠ 1{⌧ =0} is F0 measurable. Thus E[⇠ | F⌧ ] = 0 implies
⇠ 1{⌧ =0} = 0. Since F0 ✓ F⌧ , we conclude that A0 = 0 on {⌧ = 0} as well. Thus A0 = 0

and hence
hM, M it = E[⇠ 2 | F⌧ ]1[⌧,1) (t) (8.6.3)
follows from the uniqueness part of the Doob-Meyer decomposition (Theorem 8.50).
We are going to prove a structural decomposition result for square integrable martin-
gales. This would play an important role in the proof of Metivier Pellaumail inequality in
the next chapter. Here are some preparatory results.
Lemma 8.63. Let X be a square integrable martingale with Xt = Xt^T for all t, for some
T < 1 and let ⌧ be a predictable stop time such that
P(( X)⌧ 6= 0) > 0.
T
Let N be the martingale defined by
Nt = ( X)⌧ 1[⌧,1) (t)
and let Y = X F
N . Then P(( Y )⌧ 6= 0) = 0, Y is a square integrable martingale,
hY, N i = 0
A
and
hN, N it = E[( X)2⌧ | F⌧ ]1[⌧,1) (t). (8.6.4)
R
Proof. Using Xt = Xt^T , we have
|( X)⌧ |  2 sup|Xt |
tT
D
and hence in view of the Doob’s maximal inequality, Theorem 2.24, we have that ⇠ = ( X)⌧
is square integrable. Theorem 8.62 implies that N is a square integrable martingale and
that (8.6.4) is true. It follows that Y is a square integrable martingale and by construction,
P(( Y )⌧ 6= 0) = 0. Hence
( Y )t (!)( N )t (!) = 0, 8t, 8!
and hence by Lemma 8.61, hY, N i = 0.
For X 2 M2loc , applying the previous result to X [ m] 2 M2 where { m : m 1} is a

localising sequence we get:
Corollary 8.64. Let X be a locally square integrable martingale and let ⌧ be a predictable
stop time such that
P(( X)⌧ 6= 0) > 0.
Let N, Y be defined by
Nt = ( X)⌧ 1[⌧,1) (t)
and Y = X N . Then P(( Y )⌧ 6= 0) = 0, N, Y are square integrable martingales with
hY, N i = 0.
Further, hN, N i has a single jump at ⌧ and if m " 1 are bounded stop times such that
X [ m ] 2 M2 then
hN, N i⌧ 1{⌧  m } = E[( X [ m ] )2⌧ | F⌧ ]. (8.6.5)
The following technical result will be used in the decomposition of M 2 M2loc .
T
Theorem 8.65. Let M 2 M2loc be a locally square integrable martingale with M0 = 0. Let
{⌧k : k 1} be a sequence of stop times with disjoint graphs. Let
and let Aj be the compensator of V j so that W j = V j

F
Vtj = ( M )⌧j 1[⌧j ,1)
Aj 2 Mloc . Then
(8.6.6)
A
(i) For all j 1, W j 2 M2d,loc .
Pm
(ii) S m = j=1 W
j converges in Emery topology to W .
R
(iii) W 2 M2d,loc and for each i

E[ sup |Stm Wt |2 ] ! 0 as m ! 1. (8.6.7)
t i
D
(iv) [S n , S n ]t ! [W, W ]t and hS n , S n it ! hW, W it for all t 0.
Proof. Since graphs of {⌧k : k 1} are disjoint,

1
X 1
X X
[V j , Vjj ]t = ( M )2⌧j 1[⌧j ,1) (t)  ( M )2s  [M, M ]t . (8.6.8)
j=1 j=1 0<st
Also, easy to see that for j 6= k P(⌧j = ⌧k ) = 0 implies

[V j , V k ]t = 0. (8.6.9)
Let i " 1 be stop times such that M [ i] 2 M2 so that
E[ [M, M ] i ] < 1 8i 1. (8.6.10)
It follows that for every i,

1
X
lim E[ [V j , V j ] i ] = 0. (8.6.11)
m!1
j=m
P
Since Aj is compensator of V and j = V j Aj , it follows that nj=1 Aj is the com-
Wj
P P Pn
pensator of nj=1 V j and S n = nj=1 V j j
j=1 A . Using (5.6.35) along with (8.6.8) and
(8.6.9) we have
n
X n
X
E[ [S n , S n ] i ]  E[ [ V j, V j] i]
j=1 j=1
n
X
= E[ [V j , V j ] i ]
j=1
 E[ [M, M ] i ]
T
< 1.
Thus S n 2 M2loc . Since S n 2 V by construction, it follows that S n 2 M2d,loc . Similarly, for
for m  n we have
F
E[ [S n S m , S n S m ] i ]  E[
Xn
[V j , Vj ] i ].
j=m+1
(8.6.12)
A
Now (8.6.11) and (8.6.11) imply that S n is Cauchy in dem and thus converges to say W
such that S 2 M2loc (see Lemma 5.35) and further (8.6.7) holds. Since (S n )[ i ] 2 M2d , the
relation (8.6.7) implies that W [ i ] 2 M2d and hence W 2 M2d,loc .
R
From (8.6.12) it follows that

E[ hW Sm, W S m i i ] = E[ [W Sm, W Sm] i ]
1
X
 E[ [V j , Vj ] i ] (8.6.13)
D
j=m+1
! 0 as n ! 1.
Thus [S n , S n ]t ! [S, S]t and hS n , S n it ! hS, Sit for all t 0.
Lemma 8.66. Let M 2 M2 be such that Mt = Mt^T for t 0 for some T and let ⌧ be a
predictable stop time. Then
hM, M i⌧ = E[( M )2⌧ | F⌧ ] (8.6.14)
and
E[( M )2⌧ ] = E[( M 2 )⌧ ]. (8.6.15)
Proof. Let ⌧n " ⌧ be a sequence of (F + ·)-stop time announcing ⌧ so that ⌧n < ⌧ on ⌧ > 0.
Note that since Mt2 hM, M it is a martingale, for m  n we have
E[M⌧2 M⌧2n | F⌧+m ] = E[hM, M i⌧ hM, M i⌧n | F⌧+m ].
On the other hand, easy to see that
E[(M⌧ M⌧n )2 | F⌧+m ] = E[M⌧2 M⌧2n | F⌧+m ].
Taking limit as n ! 1 and using that M⌧n ! M⌧ (we need to use M0 = 0), it follows that
E[( M )2⌧ | F⌧+m ] = E[( M 2 )⌧ | F⌧+m ] = E[ hM, M i⌧ | F⌧+m ].
Now taking limit as m ! 1 and using Theorem 8.16 along with Theorem 1.36, we conclude
E[( M )2⌧ | F⌧+ ] = E[( M 2 )⌧ | F⌧+ ] = E[ hM, M i⌧ | F⌧+ ].
✓ F⌧+ measurable, we conclude
T
Since hM, M i is predictable, hM, M i⌧ is F⌧
E[( M )2⌧ | F⌧ ] = E[( M 2 )⌧ | F⌧ ] = hM, M i⌧ .
Both the required relations (8.6.14) and (8.6.15) follow from this.
F
Corollary 8.67. Let M 2 M2loc and let ⌧ be a predictable stop time. Then for all bounded
stop times such that M [ ] 2 M2
A
( hM, M i⌧ )1{⌧  } = E[( M [ ] )2⌧ | F⌧ ]. (8.6.16)
Proof. Follows from (8.6.14) by observing that hM [ ] , M [ ] i⌧ = hM, M i⌧ ^ .

R
Theorem 8.68. Let Y 2 M2loc be a locally square integrable martingale with Y0 = 0. Then
there exist sequence {⌧k : k 1} of predictable stop times such that the local martingale
D
martingale Y admits a decomposition
Y =Z +U (8.6.17)
where
(i) Utk = ( Y )⌧k 1[⌧k ,1) (t) satisfies U k 2 M2d,loc .

P1
(ii) U = k=1 U
k 2 M2d,loc (here the sum converges in the Emery topology).
(iii) [U j , U k ] = 0 and hU j , U k i = 0 for all j, k 1.

P1 k , U k ].
(iv) [U, U ] = k=1 [U
P1 k , U k i.
(v) hU, U i = k=1 hU
(vi) [Z, U ] = 0 and hZ, U i = 0.
(vii) Z is a locally square integrable martingale,

1
X
[Y, Y ] = [Z, Z] + [U k , U k ] (8.6.18)
k=1
and
1
X
hY, Y i = hZ, Zi + hU k , U k i. (8.6.19)
k=1
(viii) hZ, Zi is a continuous process.
T
Further, hU k , U k i is a process with a single jump at ⌧k and if m " 1 are bounded stop
times such that Y [ m ] 2 M2
hU k , U k i⌧k 1{⌧k  m}
= E[( Y [ m]
)2⌧k | F⌧k ]. (8.6.20)
F
Proof. Let A = hY, Y i. By definition A is an increasing predictable process with A0 = 0.
Using Theorem 8.21, we can get predictable stop times {⌧m : m 1} with disjoint graphs
A
that cover jumps of A, i.e.
X1
( A) = ( A)⌧m 1[⌧m ] . (8.6.21)
m=1
R
For k 1, let
Utk = ( Y )⌧k 1[⌧k ,1) (t). (8.6.22)
As observed in Lemma 8.63 and Corollary 8.64, U k is a locally square integrable martingale
D
and (8.6.20) holds. Since graphs of {⌧m : m 1} are disjoint, it follows that
[U k , U j ] = 0, for j, k 1 (8.6.23)
hU j , U k i = 0 for j, k 1. (8.6.24)
We wish to invoke Theorem 8.65 : we can see that V j = U j and Aj = 0 (since U j is

local martingale) and hence W j = U j . Thus it follows from Theorem bet10 that
m
X
k em
S = Uk ! U
k=1
Pn
where U 2 M2d,loc . In view of (8.6.23) and (8.6.24) we have [S n , S n ] = k=1 [U
k, U k] and
P
hS n , S n i = nk=1 hU k , U k i. Part (iv) in Theorem 8.65 now implies
1
X
[U, U ] = [U k , U k ] (8.6.25)
k=1
1
X
hU, U i = hU k , U k i. (8.6.26)
k=1
Since Z Sk and Sk do not have any common jump and S k 2 V,

[Z Sk, Sk] = 0
em
and thus S m ! U gives us
[Z U, U ] = 0.
and thus recalling that Z = Y U we conclude
T
[Y, Y ] = [Z, Z] + [U, U ].
This along with (8.6.25) implies (8.6.18). [Z, U ] = 0 also gives hZ, U i = 0 and thus
and in turn (8.6.19) follows.

F
hY, Y i = hZ, Zi + hU, U i
Remains to prove that hZ, Zi is continuous. By the choice of the stop times {⌧k : k
A
1}, it follows that the hY, Y i does not have jumps other than at {⌧k : k 1}. From
Corollary 8.67 we get
( hY, Y i⌧k )1{⌧k  = E[( Y [ m]
)2⌧k | F⌧k ]
R
m}
while from (8.6.20) it follows that

( hU k , U k i⌧k )1{⌧k  m}
= E[( Y [ m]
)2⌧k | F⌧k ].
D
Since hU j , U j i has a single jump at ⌧j and since the graphs of {⌧k : k 1} are disjoint, it
follows that
hU, U i⌧k = hU k , U k i⌧k .
Thus we conclude that for all k 1
hY, Y i⌧k = hU, U i⌧k .
This implies hZ, Zi is continuous.
Remark 8.69. Note that in the decomposition (8.6.17), Z and U are such that hU, U i is
purely discontinuous and hZ, Zi is continuous.
We will explore further structure of elements in M2d,loc and conclude with identifying the
continuous part [X, X](c) of the quadratic variation of a semimartingale X as the quadratic
variation of its continuous local martingale martingale part, to be defined below.
Lemma 8.70. Let Z 2 M2loc be such that hZ, Zi is continuous. Then for any predictable
stopping time ,
( Z) = 0. (8.6.27)
Proof. Let ⌧k " 1 be stopping times such that Z k = Z [⌧k ] 2 M2 and let Ytk = (Ztk )2
hZ, Zit^⌧k . Then Y k is a martingale and hence using Theorem 8.14 it follows that
E[( Y k ) ^n ] = 0.
Since hZ, Zit^⌧k is continuous, we conclude
T
E[(Z k^n )2 (Z(k ^n) )2 ] = 0.
Since Z k 2 M2 , Lemma 8.66 now yields
Thus
E[(Z k^n
F
Z(k ^n) )2 ] = 0.
E[( Z)2 ^n^⌧k ] = 0

A
so that
P(( Z)2 ^n^⌧k = 0) = 1.
R
Since this holds for all n and for all k and ⌧k " 1, this completes the proof.
Lemma 8.71. Let Z 2 M2loc be such that hZ, Zi is continuous. Let ⌧ be a stop time and let
D = ( Z)⌧ 1[⌧,1) . Let A be the compensator of D (A is the unique predictable process in
D
V such that R = D A is a local martingale). Then A is a continuous process, R 2 M2loc

and
[R, R]t = ( N )2⌧ 1[⌧,1) (t) (8.6.28)
Proof. Let ⌧ be any predictable stop time. By Lemma 8.70, we conclude that ( Z)⌧ = 0.
Since D = R + A this gives
( A)⌧ = ( R)⌧ .
Thus ( R)⌧ is F⌧ measurable (as A is predictable). On the other hand
E[( R)⌧ | F⌧ =0
by Theorem 8.14. Thus we get

( A)⌧ = 0
for all bounded predictable stop times. Since A is predictable, this shows that A is contin-
uous.
Theorem 8.72. Let Z 2 M2loc be such that hZ, Zi is continuous. Then Z admits a decom-
position
Z =S+R (8.6.29)
where S 2 Mc,loc and R 2 M2d,loc . Further

1
X
[Z, Z]t = [S, S]t + ( Z)2 j 1[ j ,1)
(t). (8.6.30)
j=1
T
Proof. By Theorem 8.21, we can get stop times { j : j 1} that cover the jumps of Z.
Let
Vtj = ( Z) j 1[ (t), (8.6.31)
and let Aj be the compensator of V j and Rj = Z j

process, Rj 2 M2d,loc and
F j ,1)
Aj . By Lemma 8.70, Aj is a continuous

A
[Rj , Rj ]t = ( Z)2 j 1[ j ,1)
(t).
Pn
Since Aj , Ak are continuous, [Rj , Rk ] = [Z j , Z k ] = 0 for j 6= k. Let W n = j=1 R
j. It
follows that
R
n
X Xn
[W n , W n ] = [Rj , Rj ]t = ( Z)2 j 1[ j ,1) (t) (8.6.32)
j=1 j=1
and
D
[Z W n , W n ] = 0. (8.6.33)
Further, as seen in Theorem 8.65, V n converges in Emery topology to R 2 M2d,loc and
[W n , W n ] ! [R, R]. (8.6.34)

em
V n !R along with (8.6.33) implies
[Z R, R] = 0.
Defining M = Z R, we conclude
[Z, Z] = [M, M ] + [R, R]. (8.6.35)

The relations (8.6.32) and (8.6.34) yield

1
X
[R, R] = ( Z)2 j 1[ j ,1)
(t). (8.6.36)
j=1
In turn, (8.6.35) and (8.6.36) together yield the validity of (8.6.30). Since ( [Z, Z])s =
( Z)2s and as the stop times { j : j 1} cover jumps of Z, (8.6.30) implies that [M, M ]
is continuous and hence S is a continuous local martingale. This completes the proof.
Based on general considerations such as projections in a Hilbert space, we had shown

that every square integrable local martingale X can be written as a sum of M 2 Mc,loc and
N M2d,loc . Now we have a more concrete description of this decomposition.
Theorem 8.73. Let Y 2 M2loc be a locally square integrable martingale with Y0 = 0. There
exist predictable stop times {⌧k : k 1} and a sequence of stop times { j : j 1} such
T
k j
that U and V defined by
Utk = ( Y )⌧k 1[⌧k ,1) (t)
Vtj = ( N ) j 1[
satisfy
(i) U k 2 M2d,loc for all k

F j ,1)
(t)
A
1
Pm k em
(ii) k=1 U ! U 2 M2d,loc .
(iii) For all j 1, 9 continuous process Aj 2 V such that Rj = V j Aj 2 M2d,loc .

R
Pm k em
(iv) k=1 R ! R 2 M2d,loc .
(v) [U j , U k ] = 0 and hU j , U k i = 0 for all j, k 1.

D
(vi) [Rj , Rk ] = 0 and hRj , Rk i = 0 for all j, k 1.
(vii) [Rj , U k ] = 0 and hRj , U k i = 0 for all j, k 1.

P1 k , U k ].
(viii) [U, U ] = k=1 [U
P1 k , U k i.
(ix) hU, U i = k=1 hU
P1 k , Rk ].
(x) [R, R] = k=1 [R
P1 k , Rk i.
(xi) hR, Ri = k=1 hR
(xii) N = R + U 2 M2d,loc and M = Y N 2 M2c,loc .

P
(xiii) [N, N ]t = 0<st ( Y )2s .
(xiv) [M, M ] is continuous.
Thus Y = M + N is a decomposition with M 2 M2c,loc and N 2 M2d,loc .
Proof. The proof is just putting together various parts proven in Theorem 8.68 and Theo-
rem 8.72. First get {⌧k : k 1} as in Theorem 8.68 that cover jumps of hY, Y i and define
U k , U as above. Writing Z = Y U , we conclude hZ, Zi is continuous. Now we get j to
cover jumps of Z and use results proven in Theorem 8.72.
Corollary 8.74. Let N 2 M2d,loc . Then

X
T
[N, N ] = ( N )2s .
0<st
Remark 8.75. In the decompositions Y = M + N and N = R + U , with M, N, R, U 2 M2loc ,

various parts are characterised by the following :
F
[M, M ] and hR, Ri are continuous, [N, N ] and hR, Ri are purely discontinuous.
A
We now come to identify the continuous part [X, X](c) of quadratic variation [X, X] of a
semimartingale X as the quadratic variation [X (c) , X (c) ] of the continuous local martingale
part X (c) of X.
R
Theorem 8.76. Let X be a semimartingale. Then there exists a continuous local martin-
(c)
gale X (c) with X0 = 0 and such that S = X X (c) is a semimartingale that satisfies
[U, S] = 0 for all continuous local martingales U.

D
Further, such a decomposition is unique and

X
[X, X] = [X (c) , X (c) ] + ( X)2s .
0<st
As a consequence, [X, X](c) = [X (c) , X (c) ].
Proof. First, we invoke Corollary 5.53 and decompose X = Y + A where Y 2 M2loc and
A 2 V. Then we use Theorem 8.73, we get a decomposition Y = M + N with M 2 M2c,loc
and N 2 M2d,loc . Let X (c) = M . Since N 2 M2d,loc ,
[U, N ] = 0 8U 2 M2c,loc .
Uniqueness follows easily : if X = N + R is any decomposition such that N 2 Mc,loc such

that [U, R] = 0 for all U 2 Mc,loc , then Z = X (c) N = R S is a continuous local
martingale with [Z, Z] = and hence Z = 0.
T
F
A
R
D
Chapter 9
The Davis Inequality
In this Chapter, we would give the continuous time version of the Burkholder-Davis-Gundy
T
inequality - p = 1 case. This is due to Davis. This plays an important role in answering
various questions on the stochastic integral w.r.t. a martingale M - including condition on
R
f 2 L(M ) under which f dM is a local martingale. This naturally leads us to the notion
of a sigma- martingale which we discuss.
F
We will begin with a result on martingales obtained from process with a single jump.
A
9.1 Preliminaries
Lemma 9.1. Let ⌧ be a stop time and let ⇣ be a F⌧ measurable [0, 1)-valued integrable
R
random variable. Let

Xt = ⇣ 1[⌧,1) (t)
D
Let A be the compensator of X and M = X A.

Then for all T < 1 we have
p
E[ [M, M ]T ]  3E[⇣]. (9.1.1)
Proof. Note that if is a bounded predictable stop time then
( A) = E[( X) | F ]
since E[( M ) | F ] = 0 by Theorem 8.14 and ( A) is F measurable by Theorem

8.4. Thus, for a bounded predictable stop time we have (recall that by definition,
291
292 Chapter 9. The Davis Inequality
( X)⌧ = ⇣ 1{⌧ <1} )
E[ |( A) | ] = E[ |E[( X) | F ]| ]
 E[E[ |( X) | | F ]]
(9.1.2)
= E[ |( X) | ]
= E[ |⇣|1{⌧ <1} 1{ =⌧ } ].
Given a [0, 1]-valued stop time , note that the set
A = {a 2 R : P(⌧ = a) > 0 or P( = a) > 0}
is countable. Thus, for k 1, we choose ak 2 (k, k + 1) \ Ac . Let ⌧k = ^ ak . Then (9.1.2)

gives us, for each k 1
E[ |( A)⌧k | ]  E[ |⇣|1{⌧ <1} 1{⌧k =⌧ } ]. (9.1.3)
T
Since
|( A) |  lim inf ( A)⌧k
k!1
and F
|⇣|1{⌧ <1} 1{⌧k =⌧ } " |⇣|1{⌧ <1} 1{ =⌧ } a.s.
A
we can take limit as k ! 1 and use Fatou’s lemma on left hand side and monotone
convergence theorem on right hand side to conclude
E[ |( A) | ]  E[ |⇣|1{⌧ <1} 1{ =⌧ } ]. (9.1.4)

R
Let n be predictable stop times with disjoint graphs such that
{( A) 6= 0} = [m 1[ m]
D
(existence of such stop times was proven in Theorem 8.21). Recall that the graphs being
disjoint means
P( n = m, n < 1) = 0 8n, m, n 6= m. (9.1.5)
Thus
v
u 1
p uX
[A, A]T = t ( A)2 m
m=1
1
X
 |( A) m |.
m=1
9.2. Burkholder-Davis-Gundy inequality - Continuous Time 293
Noting that by Lemma 4.68 [M, M ]T  2([X, X]T + [A, A]T ) and by definition of X,
[X, X]T = ⇣ 2 1{⌧ T } , we conclude that
p p p p
E[ [M, M ]T ]  2E[ [X, X]T + [A, A]T ]
1
X
p p
 2E[⇣] + 2E[ |( A) m |]
m=1
1 (9.1.6)
p p X
 2E[⇣] + 2E[ 1{⌧ <1} ⇣ 1{ m =⌧ }
]
m=1
p p
 2E[⇣] + 2E[⇣]
where we have used (9.1.4) and (9.1.5). This completes the proof of (9.1.1).
9.2 Burkholder-Davis-Gundy inequality - Continuous Time
T
We will prove the p = 1 case of the Burkholder-Davis-Gundy inequality: For 1  p < 1,
there exist universal constants c1p , c2p such that for all martingales M and T < 1,
p
F
c1p E[([M, M ]T ) 2 ]  E[ sup |Mt |p ]
0tT
 c2p E[([M, M ]T ) 2 ].
p
A
We have given a proof for p = 1 in the discrete case and here we will approximate the
continuous time martingale by its restriction to a discrete skeleton and then pass to the
limit.
One inequality follows easily from the discrete case. For the other we first note it for
R
the case of square integrable martingale and then later we will prove the same without this
restriction.
D
Theorem 9.2. Let c1 , c2 be the universal constants appearing in Theorem 1.44. Let M be
a martingale with M0 = 0. Then
1
c1 E[([M, M ]T ) 2 ]  E[ sup |Mt | ]. (9.2.1)
0tT
Further, if E[MT2 ] < 1 then

1
E[ sup |Mt | ]  c2 E[([M, M ]T ) 2 ]. (9.2.2)
0tT
Tk
Proof. For 0  k  2n and n 1, let tk,n = 2n and let
n 1
2X
1
n
Q =[ (Mtk+1,n Mtk,n )2 ] 2
k=0
and
Z n = max n |Mtk,n |.
1k2
Also let
p
Q= [M, M ]T .
Applying the discrete version of the inequality proven in Theorem 1.44, we have
c1 E[Qn ]  E[Z n ]  c2 E[Qn ]. (9.2.3)
We have seen in Theorem 4.59 that Qn converges to Q in probability and hence a sub-
sequence Qnk converges almost surely. Then applying Fatou’s Lemma we conclude from
(9.2.3) that
c1 E[Q]  c1 lim inf E[Qnk ]  lim inf E[Z nk ].
k!1 k!1
Since Zn
increases to Z, E[Z nk ] converges to E[Z] and thus (9.2.1) follows. Also we get
T
from (9.2.3)
E[Z]  c2 lim inf E[Qnk ].
k!1
If E[MT2 ] < 1, it follows that
F
E[(Qn )2 ] = E[MT2 ] < 1.
Noting that E[MT2 ] = E[[M, M ]T ] = E[Q2 ], it follows that Qn converges to Q in L2 (P) and
A
hence in L1 (P) and thus
lim inf E[Qnk ] = E[Q]
k!1
and thus (9.2.2) follows.
R
Remark 9.3. If M is a locally square integrable martingale, then it satisfies (9.2.2). To

see this let ⌧n be stop times increasing to 1 such that Mtn = Mt^⌧n is a square integrable
martingale. Then we have from the previous theorem that (9.2.2) holds for M n . The desired
D
conclusion follows by passing to the limit and invoking monotone convergence theorem.
We first consider a special case and show that (9.2.2) holds in this case.
Lemma 9.4. Let M be a martingale with M0 = 0 and let be a stop time bounded by T
such that
|Mt |  K 8t < . (9.2.4)
and
Mt = Mt^ 8t. (9.2.5)
p
Then E[ [M, M ]T ] < 1 and (9.2.2) holds for M .
Proof. Let ⇠ = ( M ) . Since M is a martingale and is bounded, it follows that ⇠ is

integrable. Further,
sup |Mt |  K + |⇠|
0tT
and hence sup0tT |Mt | is integrable. Hence by first part of Theorem 9.2, it follows that
p
E[ [M, M ]T ] < 1. Let
Ajt = ⇠ + 1{|⇠| j} 1[ ,1) (t)
Btj = ⇠ 1{|⇠| j} 1[ ,1) (t)
and let C j , Dj be the compensators of Aj , B j respectively, i.e. predictable increasing

processes (see Lemma 8.42 and Lemma 9.1 ) such that
Utj = Ajt Ctj
T
Vtj = Btj Dtj
are martingales. Since Ajt = Ajt^ , it follows that Ctj = Ct^ j

and hence Utj = Ut^
j
.
j j
Likewise, Vt = Vt^ . As seen in Lemma 9.1, we have
q
q
F
E[ [U j , U j ]T ]  3E[⇠ + 1{|⇠| j} ]
E[ [V j , V j ]T ]  3E[⇠ 1{|⇠| j} ]
(9.2.6)
A
(9.2.7)
while in Lemma 9.1, it was shown that
E[ |Utj | ]  3E[⇠ + 1{|⇠| j} ] (9.2.8)

R
E[ |Vtj | ]  3E[⇠ 1{|⇠| j} ] (9.2.9)
Let
D
Mtj = Mt Utj + Vtj .
Then M j = M U j + V j . Now
Mtj = Mt (Ajt Btj ) + (Ctj Dtj ).
Now |Mt (Ajt Btj )| K for t < (as in that case Ajt = Btj = 0). Also
M (Aj Bj ) = M +⇠ ⇠ + 1{|⇠| j} + ⇠ 1{|⇠| j}
=M + ⇠ 1{|⇠|<j} .
Further,
Mt (Ajt Btj ) = Mt^ (Ajt^ j
Bt^ ).
Hence
|Mt (Ajt Btj )|  K + j 8t.
C j and Dj being predictable r.c.l.l. processes are locally bounded and hence it follows that
M j is locally bounded, hence locally square integrable. Thus by Remark 9.3, we have
1
E[ sup |Mtj | ]  c2 E[([M j , M j ]T ) 2 ]. (9.2.10)
0tT
In view of (9.2.8) and (9.2.9), UTj ! 0 and VTj ! 0 in L1 (P) and hence MTj ! MT in
L1 (P). Thus, by Doob’s maximal inequality,
P( sup |Mtj Mt | > ✏) ! 0.

0tT
By going through a subsequence, and using Fatou’s Lemma we conclude from (9.2.10) that
T
1
E[ sup |Mt | ]  c2 lim inf E[([M j , M j ]T ) 2 ]. (9.2.11)
0tT j!1
Now M Mj = Uj V j and hence (using (4.6.13))
Thus
E[([M Mj, M
[M Mj, M
1
M j ]T ) 2 ] 
p
F
M j ]t  2([U j , U j ]t + [V j , V j ]t )
1
2E[([U j , U j ]T ) 2 ] +
p 1
2E[([V j , V j ]T ) 2 ]
A
p (9.2.12)
 3 2E[ |⇠|1{|⇠| j} ]
where we have used (9.2.6), (9.2.7) and hence
R
1
lim E[([M Mj, M M j ]T ) 2 ] = 0. (9.2.13)
j!1
Using (4.6.21), we see that

D
[M Mj, M M j ]T = [M, M ]T + [M j , M j ]T 2[M, M j ]T

q
[M, M ]T + [M j , M j ]T 2 [M, M ]T [M j , M j ]T (9.2.14)
p q
( [M, M ]T [M j , M j ]T )2 .
Hence in view of (9.2.13), we conclude
q p
lim E[ [M j , M j ]T ] = E[ [M, M ]T ].
j!1
This and (9.2.11) together imply that (9.2.2) holds for M .
We are now in a position to prove p = 1 case of Burkholder-Davis-Gundy inequality.

Theorem 9.5. There exist universal constants c1 , c2 such that for all local martingales M
with M0 = 0 and for all t > 0 one has
1 1
c1 E[([M, M ]T ) 2 ]  E[ sup |Mt | ]  c2 E[([M, M ]T ) 2 ]. (9.2.15)
0tT
Proof. Let {⌧n : n 1} be stop times increasing to 1 such that Mt^⌧n is a martingale.
For n 1 let
⇣n = inf{t 0 : |Mt | n or |Mt | n}
and let n = ⌧n ^ ⇣n ^ n. Let

Ntn = Mt^ n .
Then N n is a martingale and satisfies the conditions of Lemma 9.4 with = n , K = n,

T = n and hence N n satisfies (9.2.2). We have already noted that (9.2.1) holds for N n in
T
Theorem 9.2. Thus we have
1 1
c1 E[([N n , N n ]T ) 2 ]  E[ sup |Ntn ]| ]  c2 E[([N n , N n ]T ) 2 ] < 1. (9.2.16)
0tT
1 1
F
Now as n ! 1, ([N n , N n ]T ) 2 increases to ([M, M ]T ) 2 and sup0tT |Ntn | increases to
sup0tT |Mt ]| and thus (9.2.15) follows from (9.2.16) using Monotone Convergence Theo-
rem.
A
During the proof given above we have shown the following:
Corollary 9.6. Let M be a local martingale. Then there exist stop times n increasing
R
to 1 such that
p
E[ [M, M ] n ] < 1 8n 1 (9.2.17)
D
E[ sup |Mt ]| < 1 8n 1. (9.2.18)

0t n
Corollary 9.7. Let M be a local martingale. For any stop time , one has
1 1
c1 E[([M, M ] ) 2 ]  E[ sup |Mt | ]  c2 E[([M, M ] ) 2 ]. (9.2.19)
0t
Corollary 9.8. If M is a local martingale and is a stop time such that

1
E[([M, M ] ) ] < 1]
2 (9.2.20)
then it follows that E[sup0t |Mt ]| < 1 for all T < 1 and hence Nt = Mt^ is a
martingale.
Here is a consequence of the Theorem 9.5 that will be needed later.
Theorem 9.9. Let X be a martingale such that

E[ sup |Xt | ] < 1 8T < 1 (9.2.21)
0tT
or equivalently, such that
1
E[([X, X]T ) 2 ] < 1 8T < 1.
Then there exists a sequence of bounded martingales Z k such that
lim E[ sup |Ztk Xt | ] = 0 8T < 1. (9.2.22)
k!1 0tT
Proof. We will show that for all k 1, there exists a bounded martingale Z k such that
1
E[ sup |Ztk Xt | ]  . (9.2.23)
0tk k
T
The required result follows from this.
Thus we fix an integer k < 1. Let n be the stop times constructed in the proof
of Theorem 9.5 with M = X and N n denote the martingale X stopped at n . Since
E[ sup |Yt
0tk
F
sup0tT |Ntn | increases to sup0tT |Xt |, we can get integer n such that Y = N n satisfies
Xt | ] 
1
3k
. (9.2.24)
A
As noted in the proof of Theorem 9.5, N n and hence Y satisfies the conditions of Lemma
9.4. Thus for M = Y , we can get locally bounded martingales M j such that (9.2.13) holds,
i.e.
R
1
lim E[([Y M j , Y M j ]k ) 2 ] = 0. (9.2.25)
j!1
Now using Burkholder-Davis-Gundy inequality Theorem 9.5, we can get j such that W =
M j satisfies
D
1
E[ sup |W Yt | ]  . (9.2.26)
0tk 3k
Finally, W being locally bounded, we can get stop times ⌧n increasing to 1 such that U n
given by Utn = Wt^⌧n is a bounded martingale and
E[ sup |Utn W | ] ! 0 as n ! 1
0tk
and hence can get n such that Z = U n satisfies
1
E[ sup |Zt W|]  . (9.2.27)
0tk 3k
Now (9.2.25)-(9.2.27) together imply (9.2.23) with Z k = Z.
9.3. On Stochastic Integral w.r.t. a Martingale 299
Remark 9.10. The martingales Z k obtained in the Theorem also satisfy

1
lim E[([Z k X, Z k X]T ) 2 ] ! 0 8T < 1. (9.2.28)
k!1
This follows from the Burkholder-Davis-Gundy inequality (Theorem 9.5).
Remark 9.11. A martingale M is said to be a H1 -martingale if
E[ sup |Mt |] < 1 (9.2.29)

0t<1
In view of Davis inequality, it follows that M is a H1 -martingale if and only if

p
E[ sup [M, M ]T ] < 1 (9.2.30)
0T <1
It also follows that if M is a H1 martingale and if f is a bounded predictable process then

R
N = f dM is also a H1 -integrable martingale.
T
9.3 On Stochastic Integral w.r.t. a Martingale
R
F
For a local martingale M , the stochastic integral Y = f dM for f 2 L(M ) is defined (since
M is also a stochastic integrator), we have only observed that when M is locally square
integrable martingale and f 2 L2m (M ), Y is also a locally square integrable martingale.
A
We now explore as to when is Y a martingale or a local martingale. We begin with an
observation.
1
Theorem 9.12. Let M be a martingale such that E[([M, M ]T ) 2 ] < 1 8T < 1 and f be a
R
R 1
bounded predictable process. Then N = f dM is also a martingale and E[([N, N ]T ) 2 ] < 1
8T < 1.
R
D
Proof. If f is bounded by c, and N = f dM (interpreted as a stochastic integral w.r.t.

stochastic integrator M ) then N satisfies
Z T
[N, N ]T = |f |2 d[M, M ]s  c2 [M, M ]T
0
1
and hence E[([N, N ]T ) ] < 1 8T < 1. Let A be the class of bounded predictable process
2
R
f such that N = f dM is a martingale. It is easy to see that simple predictable processes
bp R R
belong to A. If g n 2 A and g n ! g, then writing N n = g n dM and N = gdM , we see
that Z T 1
E[ ( |gsn gs |2 d[M, M ]s ) 2 ] ! 0 as n ! 1.
0
Hence
p
E[ [N n N, N n N ]T ] ! 0 as n, ! 1
and as a consequence, (using (9.2.15))
E[ sup |Nsn Ns | ] ! 0 as n ! 1.
0tT
Thus N is a martingale. Thus A is closed under bp-convergence and hence by Theorem

2.64, it follows that A is the class of all bounded predictable processes completing the
proof.
By localizing, we immediately conclude that
Corollary 9.13. Let M be a local martingale and f be a locally bounded predictable

R
T
process. Then Y = f dM is also a local martingale.
As noted earlier, for an r.c.l.l. adapted process X, X (defined by Xs = Xs ) is a

locally bounded predictable process, we conclude:
R
Y = X dM is also a local martingale.
F
Corollary 9.14. Let M be a local martingale and X be an r.c.l.l. adapted process. Then
A
Earlier we have defined L2m (M ) for a locally square integrable martingale M . We now
define L1m (M ) for a local martingale M .
R
Definition 9.15. For a local martingale M , L1m (M ) is the class of predictable processes f
such that there exist stop times ⇣n increasing to 1 with
Z ⇣n
1
E[( fs2 d[M, M ]s ) 2 ] < 1. (9.3.1)
D
Theorem 9.16. Let M be a local martingale. Then L1m (M ) ✓ L(M ) and for f 2 L1m (M ),
R
N = f dM is a local martingale.
Proof. Let f 2 L1m (M ) be such that (9.3.1) holds. We first show that f 2 L(M ). Let g k
be bounded predictable processes converging pointwise to g such that |g k |  |f |.
R
For k 1, let Y k = g k dM . Then we have seen that Y k is a local martingale. From
properties of stochastic integrators, we have
Z t
k k
[Y , Y ]t = (g k )2 d[M, M ]
0
9.3. On Stochastic Integral w.r.t. a Martingale 301
and hence Z ⇣n 1
E[ sup |Ysk | ] 2
 c E[( (fs )2 d[M, M ]s ) 2 ] < 1 (9.3.2)
0t⇣n 0
where ⇣n is as in (9.3.1). It thus follows that Utk,n = Yt^⇣k

n
is a martingale for each k, n.
Moreover, it follows that for k j 1
Z t
k j k j
[Y Y ,Y Y ]t = (g k g j )2 d[M, M ].
0
Hence, using (9.2.19), we get
Z ⇣n 1
E[ sup |Y k Y j | ]  c2 E[( (gsk gsj )2 d[M, M ]s ) 2 ].
0t⇣n 0
The right hand side above goes to 0 as k, j tend to 1 in view of the assumption (9.3.1) and
choice of g k (using Lebesgue’s dominated convergence theorem). Thus we have for each
n 1
T
lim ( sup E[ sup |Ytk Ytj | ] ) = 0. (9.3.3)
m!1 j,k m 0t⇣n
Thus {Y k}are Cauchy in ducp and hence f 2 L(M ). Let Y be the limit of Y k . By
R
k!1 0t⇣n
F
dominated convergence theorem, we get Y = gdM We also get from (9.3.3) that
lim E[ sup |Ytk Yt | ] = 0.
A
This and Utk,n = Yt^⌧ k
n
being a martingale for each k, n implies that Utn = Yt^⌧n is a
martingale and hence Y is a local martingale.
To show that N is a local martingale, let us take g k = f 1{|f |k} . The process Y for
R
this choice of {g k } equals N which has been shown to be a local martingale completing the
proof.
Corollary 9.17. Let M be a local martingale and f 2 L(M ) be such that

D
E[ |f ( M ) | ] < 1 8 bounded stop times . (9.3.4)

R
Then f 2 L1m (M ) and Z = f dM is a local martingale.
Proof. For n 1, let

Z s
n = inf{s : (s + fu2 d[M, M ]u ) n}.
0
Rt
Then f 2 L(M ) implies that n " 1. Of course n  n and for t < n , 0 fs2 d[M, M ]s  n.
Thus, sZ
n q p
fs2 d[M, M ]s  n + f 2n ( M )2 n  n + |f n ( M ) n |
0
and thus in view of the assumption (9.3.4) on M ,

sZ
n
E[ fs2 d[M, M ]s ] < 1
0
and thus f 2 L1m (M ). The second part follows from Theorem 9.16.
Corollary 9.18. Let M be a local martingale and f 2 L(M ) be such that

Z t
Zt = fs dMs
0
is bounded. Then Z is a martingale.
Proof. Since Z is bounded, f satisfies (9.3.4). Thus by Corollary 9.17, Z is a local martin-
gale. Since it is bounded, it follows that Z is a martingale.
T
Corollary 9.19. Let M be a continuous local martingale. Then
L(M ) = L1m (M ) (9.3.5)
Corollary 9.18. F
Proof. Since M is continuous, (9.3.4) is trivially satisfied and hence the result follows from
The Burkholder-Davis-Gundy inequality helps us to conclude the converse to Theorem

A
9.16:
R
Theorem 9.20. Let M be a local martingale and f 2 L(M ) and let N = f dM be a local
R
martingale. Then f 2 L1m (M ).

Rt
Proof. Since N is a local martingale and [N, N ]t = 0 fs2 d[M, M ]s , Corollary 9.6 implies
f 2 L1m (M ).
D
9.4 Sigma-Martingales
R
We have seen that if M is a local martingale and f 2 L1m (M ) then X = f dM is a local
martingale. On the other hand if f 2 L(M ) but does not belong to L1m (M ) then X is
defined and is a semimartingale but it is not a local martingale. Nonetheless, it shares
some properties of a local martingale and is called a sigma-martingale.
Definition 9.21. A semimartingale X is said to be a sigma-martingale if there exists a local

R
martingale N and f 2 L(N ) such that X = f dN .
9.4. Sigma-Martingales 303
If X is a sigma-martingale with f, N as in the definition above and g 2 L(X) then

R R
Y = gdX = gf dN and hence Y is also a sigma-martingale. Here is an elementary
observation.
Lemma 9.22. Let X be a semimartingale. Then X is a sigma-martingale if and only if

R
there exists a (0, 1) valued predictable process such that 2 L(X) and M = dX is a
martingale.
1
R
Proof. If such a M , exist, then = 2 L(M ) and X = dM .
R
For the converse part, suppose N is a local martingale and f 2 L(N ) with X = f dN .
R R
Then taking g = (1 + |f |) 1 , we observe that Y = gdX = f gdN . Since N is a local
R
martingale and f g is bounded by 1, invoking Corollary 9.13 we conclude that Y = f gdN
is itself a local martingale. As seen in Corollary 9.6, there exist stop times n increasing
T
to 1 such that
p
an = E[ [Y, Y ] n ] < 1.
Let h be the predictable process defined by
hs =
1
1 + |Y0 |
1{0} (s) +
X
n=1
2 n
F
1
1
1
1 + an ( n 1 , n ]
(s).
A
R
Then h in (0, 1) valued and thus M = hdY is a local martingale. It can be checked that
p
E[ [M, M ]T ] < 1 and |M0 |  1. As a result M is a martingale. Let = hg. Then is
R
(0, 1) valued and dX = M .
R
From the definition, it is not obvious that sum of sigma-martingales is also a sigma-
martingale, but this is so as the next result shows.
D
Theorem 9.23. Let X 1 , X 2 be sigma-martingales and a1 , a2 be real numbers. Then Y =

a1 X 1 + a2 X 2 is also a sigma-martingale.
Proof. Let 1, 2 be (0, 1)-valued predictable processes such that

Z t
i i i
Mt = s dXs , i = 1, 2
0
are martingales. Then, writing ⇠ = min( 1 , 2 ) and ⌘si = ⇠si , it follows that
s
Z t Z t
Nti = ⌘si dMsi = ⇠s dXsi
0 0
are martingales since ⌘ i is bounded by one. Clearly, Y = a1 X 1 + a2 X 2 is a semimartingale

and ⇠ 2 L(X i ) for i = 1, 2 implies ⇠ 2 L(Y ) and
Z t
⇠s dYs = a1 Ns1 + a2 Ns2
0
is a local martingale. Since ⇠ is (0, 1)-valued predictable process, it follows that Y is a
sigma- martingale.
The following result gives conditions under which a sigma-martingale is a local martin-
gale.
Lemma 9.24. Let X be a sigma-martingale with X0 = 0. Suppose there exists a sequence

of stop times ⌧n " 1 such that
p
E[ [X, X]⌧n ] < 1 8n. (9.4.1)
T
Then X is a local martingale.
R
Proof. Let N be a local martingale and f 2 L(N ) be such that X = f dN . Note that
Z t
Let
[X, X]t =
Xtk =
Z t
0 F
(fs )2 d[N, N ]s . (9.4.2)
A
fs 1{|fs |k} dNs . (9.4.3)
0
Noting that fs 1{|fs |k} is bounded, it follows that X k is a local martingale. Since
sZ
q ⌧n
R
E[ [X k , X k ]t^⌧n ]  E[ fs2 1{|fs |k} d[N, N ]s ]

0
p
 E[ [X, X]⌧n ]
D
<1
we conclude that for k, n fixed, Ztk,n = Xt^⌧
k
n
is a martingale. Let Ztn = Xt^⌧n . Further,
sZ
q ⌧n
E[ [X X k , X X k ]t^⌧n ]  E[ fs2 1{|fs |>k} d[N, N ]s ]. (9.4.4)
0
The assumption (9.4.1) and the estimate (9.4.4) implies that for n fixed,
q
lim E[ [X X k , XX k]
t^⌧n ] = 0. (9.4.5)
k!1
The Burkholder-Davis-Guindy inequality- Corollary 9.7 now gives
lim E[sup |Ztk,n Ztn |] = 0. (9.4.6)
k!1 st
9.5. Auxiliary Results 305
Since Z k,n is a martingale for each k, n, (9.4.6) implies Z k is a martingale and thus X is a
local martingale.
Corollary 9.25. Let X be a sigma-martingale. Suppose that X0 is integrable and that

there exists a sequence of stop times ⌧n " 1 such that (9.4.1) holds then X is a local
martingale.
Proof. Let Yt = Xt X0 . Observe that [Y, Y ]t = [X, X]t for all t. Now the previous result
gives that Y is a local martingale and hence X is a local martingale.
Corollary 9.26. A bounded sigma-martingale X is a martingale.
Proof. Since X is bounded, say by K, it follows that jumps of X are bounded by 2K. Thus
jumps of the increasing process [X, X] are bounded by 4K 2 and thus X satisfies (9.4.1) for
T
⌧n = inf{t 0 : [X, X]t n}.
Thus X is a local martingale and being bounded, it is a martingale.
F
Here is a variant of the example given by Emery [17] of a sigma-martingale that is not
a local martingale. Let ⌧ be a random variable with exponential distribution (assumed
A
to be (0, 1)-valued without loss of generality) and ⇠ with P(⇠ = 1) = P(⇠ = 1) = 0.5,
independent of ⌧ . Let
Mt = ⇠ 1[⌧,1) (t)
R
1
and Ft = (Ms : s  t). Easy to see that M is a martingale. Let ft =
Rt t 1(0,1) (t) and
Xt = 0 f dM . Then X is a sigma-martingale and
1
[X, X]t = 1 (t).
⌧ 2 [⌧,1)
D
For any stop time , it can be checked that is a constant on < ⌧ and thus if is not
p 1
identically equal to 0, (⌧ ^ a) for some a > 0. Thus, [X, X]
p ⌧ 1{⌧ <a} . It follows
that for any stop time , not identically zero, E[ [X, X] ] = 1 and so X is not a local
martingale.
9.5 Auxiliary Results

We have seen that if M, N are locally square integrable martingales then M N [M, N ] is
a local martingale. We now show that the same is true for all local martingales M, N .
Theorem 9.27. Let M, N be local martingales with M0 = 0 Let Xt = Mt Nt [M, N ]t .

Then X is a local martingale.
Proof. The integration by parts formula - (4.6.7) gives

Z t Z t
Xt = Ms dNs + Ns dMs
0 0
and by Corollary 9.14 it follows that X is a local martingale.
Lemma 9.28. Let N be martingale such that E[sup0tT |Nt | ] < 1 for all T < 1 and let
A 2 V be a predictable process with A0 = 0 such that |A|T  KT for some constant KT < 1
Rt
for all T < 1, where |A|T is the variation of At on [0, T ]. Then Yt = At Nt 0 Ns dAs
is a martingale.
T
Proof. Invoking Theorem 9.9, obtain bounded martingales N k such that
lim E[ sup |Ntk Nt | ] = 0 8T < 1.

k!1 0tT
Rt
Let Ytk = At Ntk 0 Nsk dAs . Note that
F
E[ sup |Ytk | ]  2KT Ck
0tT
(9.5.1)
A
where Ck is a bound for Y k . Also,
E[ sup |Ytk Yt | ]  2KT E[ sup |Ntk Nt | ] (9.5.2)

0tT 0tT
R
By integration by parts formula (4.6.7),

Z t
k
Yt = As dNsk + [A, N k ].
0
D
The integral appearing above is a local martingale by Corollary 9.14 and [A, N k ] is a
martingale by Theorem 8.33. Thus Y k is a local martingale. Lemma 5.5 along with the
observation (9.5.1) implies that Y k is a martingale for each k and then (9.5.2) along with
Theorem 2.21 shows that Y is a martingale.
Theorem 9.29. Let M be local martingale such that M0 = 0 and let A 2 V be a predictable
Rt
process with A0 = 0. Then Yt = At Mt 0 Ms dAs is a local martingale.
Proof. Since A 2 V is predictable, so is its total variation process B = |A| (see Corollary
n
8.23). Thus B is locally bounded and we can get stop times ⌧ n such that B ⌧ is bounded.
9.5. Auxiliary Results 307
n]
Invoking Corollary 9.8, get stop times n " 1 such that M n = M [ are martingales
satisfying, for each n 1
E[ sup |Mtn ]| < 1 8T < 1.
0tT
Without loss of generality (by replacing n by min( n , ⌧ n ) if necessary), we can assume

n
that n  ⌧ n and so B n = B is bounded for each n.
n
Now using Lemma 9.28 it follows that Y n = Y [ ] satisfies
Z t
Ytn = Ant Mtn Msn dAns
0
n
where An =A and is thus a martingale. This shows Y is a local martingale.
As a consequence of Theorem 9.16, we have the following observation.
T
Lemma 9.30. Let M, N be local martingales such that M0 N0 is integrable. Then the process
Z defined by Zt = Mt Nt is locally integrable if and only [M, N ] is locally integrable.
Proof. The integration by parts formula gives
Mt N t = M0 N 0 +
Z t
Ms dNs +
0
F
Z t
Ns dMs + [M, N ]s .
0
Theorem 9.16 yields that the stochastic integral terms in the right hand side above are
A
local martingales and thus the result follows.
Remark 9.31. If M, N are local martingales such that M N is locally integrable, then so is
[M, N ] and thus hM, N i exists and is the unique predictable process in V+
R
0 such that
Mt N t hM, N it
is a local martingale.
D
Chapter 10
Integral Representation of Martingales
In this chapter we will consider the question as to when do all martingales adapted to
T
a filtration (F· ) admit a representation as a stochastic integral with respect to a given
local martingale M . This result was proved by Ito when the underlying filtration is the
filtration generated by a multidimensional Wiener process. Ito had proven the integral
martingales by Clark.
F
representation property for square integrable martingales and this was extended to all
Jacod and Yor investigated this aspect and proved that the integrable representation
A
property holds if and only if there does not exist any other probability measure Q equivalent
to the underlying probability measure with the property that X is a Q - local martingales.
Such a measure Q is called an Equivalent Martingale Measure (EMM). In other words,
R
martingale representation property holds if and only if EMM is unique. Jacod-Yor proved
this result in one dimension and in a special case for multidimensional local martingale,
which was subsequently extended.
D
This result is important from the point of view of mathematical finance. We will give
brief introduction to same and prove the second fundamental theorem of asset pricing.
10.1 Preliminaries
Throughout this chapter, we will be working with one fixed filtration (F⇧ ). All notions
- martingale, local martingale, stop time, adapted process, predictable process are with
reference to this fixed filtration.
Let X 1 , X 2 , . . . , X d be semimartingales. We introduce the class C(X 1 , X 2 , . . . , X d ) of
308
10.1. Preliminaries 309
semimartingales that admit integral representation w.r.t. X 1 , X 2 , . . . , X d :

d Z t
X
C(X 1 , X 2 , . . . , X d ) = {Y : 9g j 2 L(X j ), 1  j  d with Yt = Y0 + g j dX j 8t < 1.}
j=1 0
Let us note that if Y 2 C(X 1 , X 2 , . . . , X d ) then for any stop time ⌧ , Ỹ defined by Ỹt = Yt^⌧
also belongs to C(X 1 , X 2 , . . . , X d ).
A semimartingale Y is said to have an integral representation w.r.t. semimartingales
X 1 , X 2 , . . . , X d if Y 2 C(X 1 , X 2 , . . . , X d ). Here is an elementary observation on the class
C(X 1 , X 2 , . . . , X d ).
Lemma 10.1. Let Y be a semimartingale such that for a sequence of stop times ⌧n " 1,
Y n defined by Ytn = Yt^⌧n admits an integral representation w.r.t. X 1 , X 2 , . . . , X d for each
n 1. Then Y also admits an integral representation w.r.t. X 1 , X 2 , . . . , X d .
T
Proof. Let f n,j 2 L(X j ), 1  j  d, n 1 be such that for all n,
Xd Z t
Ytn = Y0n + f n,j dX j .
Define f j by
j
f =
1
X
F
j=1
1(⌧n
0
f n,j .
A
1 ,⌧n ]
n=1
Then it is easy to check (using Theorem 4.39) that f j 2 L(X j ) and

d Z t
X
R
Yt = Y0 + f j dX j .
j=1 0

D
Exercise 10.2. Let Y be an r.c.l.l. process such that it is a local martingale under probability
measure Q1 as well as Q2 . Show that Y is a local martingale under Q = 12 (Q1 + Q2 ).
Given r.c.l.l. adapted process X 1 , X 2 , . . . , X d , let E(X 1 , X 2 , . . . , X d ) denote the class of

probability measures Q on (⌦, F) such that X 1 , X 2 , . . . , X d are Q- local martingales. For
a probability measure P on (⌦, F), let EP (X 1 , X 2 , . . . , X d ) denote the class of measures
Q 2 E(X 1 , X 2 , . . . , X d ) such that Q is equivalent to P and let E e P (X 1 , X 2 , . . . , X d ) denote
the class of measure Q 2 E(X 1 , X 2 , . . . , X d ) such that Q is absolutely continuous w.r.t. P.
It is fairly easy to see that E(X 1 , X 2 , . . . , X d ), EP (X 1 , X 2 , . . . , X d ) and Ee P (X 1 , X 2 , . . . , X d )
are convex sets for any X 1 , X 2 , . . . , X d .
310 Chapter 10. Integral Representation of Martingales
Elements of EP (X 1 , X 2 , . . . , X d ) are referred to as EMM- equivalent martingale mea-

sures, though they should be called equivalent local martingale measures.
Likewise we introduce E (X 1 , X 2 , . . . , X d ) - the class of probability measures Q on
(⌦, F) such that X 1 , X 2 , . . . , X d are -martingales on (⌦, F, Q) and EP (X 1 , X 2 , . . . , X d )
denote the class of measure Q 2 E (X 1 , X 2 , . . . , X d ) such that Q is equivalent to P.
EP (X 1 , X 2 , . . . , X d ) is the class of equivalent -martingale measures.
Jacod and Yor discovered a connection between extreme points of P of E(X) and the
martingale representation property w.r.t. X. This was later generalized to multi dimensions
under suitable conditions. We will first deal with the one dimensional case and then take
up multidimensional case. We will give an alternate definition of vector stochastic integral.
Later we will prove integral representation theorem for multidimensional -martingales.
We will also discuss relevance of integral representation theorem to mathematical finance.
T
10.2 One Dimensional Case
F
In this section, we will fix a local martingale M and explore as to when C(M ) contains all
martingales. The next lemma gives an important property of C(M ).
A
Lemma 10.3. Let M be a local martingale and let N n 2 C(M ) be martingales such that
E[ |Ntn Nt | ] ! 0 for all t. Then N 2 C(M ).
Proof. The assumptions imply that N is a martingale (see Theorem 2.21). In view of
R
Theorem 5.33 and the assumptions on N n , N , it follows that
N n converges to N in Emery topology.

D
Thus, invoking Theorem 4.103, we conclude that
[N n N, N n N ]T ! 0 in probability as n ! 1. (10.2.1)
Hence, using [N n N m , N n N m ]T  2([N n N, N n N ]T + [N m n, N m N ]T ) (see

(4.6.13)), we have
[N n N m, N n N m ]T ! 0 in probability as n, m ! 1. (10.2.2)
Since N n 2 C(M ), there exists predictable process g n 2 L(M ) such that

Z t
n n
Nt = N0 + g n dM. (10.2.3)
0
10.2. One Dimensional Case 311
As a consequence, for all T < 1,

Z T
n m n m
[N N ,N N ]T = (gsn gsm )2 d[M, M ]s .
0
! 0 in probability as n, m ! 1.
By taking a subsequence, if necessary and relabeling, we assume that for 1  k  n,
Z k
1 1 1
P(( (gsn gsk )2 d[M, M ]s ) 2 k
)  k. (10.2.4)
0 2 2
Then by Borel-Cantelli Lemma, we conclude
X1 Z T
1
( (gsk+1 gsk )2 d[M, M ]s ) 2 < 1 a.s. (10.2.5)
m=1 0
for all T < 1. Since

Z T X 1 Z
T
1 X T
1 1
[ ( |gsk+1 gsk |)2 d[M, M ]s ] 2  ( (gsk+1 gsk )2 d[M, M ]s ) 2
0 m=1 m=1 0
we conclude that for all T < 1
and also
[
Z T X
0
1
( |gsk+1
k=1
F
gsk |)2 d[M, M ]s ] < 1 a.s. (10.2.6)
A
Z T
lim sup |gsm gsn |2 d[M, M ]s = 0 a.s. (10.2.7)
k!1 0 m,n k
Let be the ( -finite) measure on (⌦,e F)

e where ⌦ e = [0, 1) ⇥ ⌦ and Fe is the product of
R
F and the Borel -field on [0, 1) defined by, for E 2 Fe

Z Z 1
X (E) = [ 1E (s, !)d[M, M ]s (!)]dP(!). (10.2.8)
0
D
Now (10.2.6) implies that

1
X
|gsk+1 (!) gsk (!)| < 1 a.e. .
k=1
Thus gk converges a.e. . Let
gs (!) = lim sup gsk (!).

k!1
Using (10.2.7), one can conclude that for all t < 1, for all ✏ > 0
Z t
1
lim P(( (gsk gs )2 d[M, M ]s ) 2 ✏) = 0. (10.2.9)
k!1 0
and Z Z
t t
(gsk )2 d[M, M ]s ! (gs )2 d[M, M ]s in probability.
0 0
On the other hand convergence of N n to N in Emery topology and Theorem 4.103 implies
for all t < 1
Z t
(gsk )2 d[M, M ]s = [N k , N k ]t ! [N, N ]t in probability.
0
Thus Z t
[N, N ]t = (gs )2 d[M, M ]s . (10.2.10)
0
Now N being a martingale, as seen in Corollary 9.6, there exist stop times n increasing
to 1 such that
p
E[ [N, N ] n ] < 1 8n 1 (10.2.11)
Rt
T
and hence (10.2.10) implies that g 2 L1m (M ). Let Yt = N0 + 0 gdM . By definition, Y is
a local martingale with Y0 = N0 . Now
Z T
n n
[N Y, N Y ]T = (gsn gs )2 d[M, M ]s
and thus as seen in (10.2.9),

[N n Y, N n
F 0
Y ]T ! 0 in probability (10.2.12)
A
On the other hand N n converges to N in Emery topology and thus invoking Theorem 4.103
we conclude that
[N n Y, N n
R
Y ]T ! [N Y, N Y ]T in probability. (10.2.13)
Thus [N Y, N Y ]T = 0 and recalling that N, Y are local martingales such that N0 = Y0 ,
it follows (once again invoking Burkholder-Davis-Gundy inequality for p = 1) that N = Y .
Rt
D
Hence Nt = N0 + 0 f dM with f 2 L(M ). This proves N 2 C(M ).
Theorem 10.4. For a local martingale M and T < 1 let

KT (M ) = {NT : N 2 C(M ) \ M}. (10.2.14)
Then KT (M ) is a closed linear sub-space of L1 (⌦, FT , P).
Proof. Let N n 2 C(M ) \ M be such that NTn converges in L1 (⌦, FT , P) to ⇠. Without loss
of generality, we assume that Ntn = Nt^T
n for all n 1 and for all t < 1. Now for each n,
N n is a uniformly integrable martingale. It follows that for all t
E[|Ntn Ntm | ] ! 0 as n, m ! 1. (10.2.15)
Thus, by Theorem 5.33, it follows that {N n } is Cauchy in the dem metric for the Emery
topology. Since this metric is complete, the sequence N n converges in the Emery topology
to say N . Then N n also converges in ducp to N and in turn, in view of (10.2.15), we
conclude NT = ⇠ and for each t
E[|Ntn Nt | ] ! 0 as n ! 1. (10.2.16)
Thus Lemma 10.3 implies N 2 C(M ) and thus NT = ⇠ 2 KT (M ).
Exercise 10.5. Show that ⇠ 2 KT if and only if ⇠ 2 L1 (⌦, FT , P) and there exist ⌘ 2
RT
L1 (⌦, F0 , P) and g 2 L1m (M ) such that ⇠ = ⌘ + 0 gdM .
We now come to the main result of this section, due to Jacod-Yor [28]. This character-
izes martingales M with property that all martingales N admit an integral representation
w.r.t. M .
T
Definition 10.6. A process Y is said to admit an integral representation w.r.t. a semimartin-
gale X if Z t
F
9f 2 L(X) such that Yt = Y0 +
0
fs dXs a.s. 8t. (10.2.17)
Note that if Y is r.c.l.l. process that admits a representation w.r.t. a semimartingale

Rt
A
X, then Y is itself a semimartingale and we then have P(Yt = Y0 + 0 fs dXs 8t) = 1. On
the other hand, even if Y is not r.c.l.l. to begin with, if it admits a representation as in
(10.2.17), then it has r.c.l.l. modification since the stochatstic integral is by definition an
r.c.l.l. process.
R
Here is an important observation on integral representation.
Lemma 10.7. Let M be an r.c.l.l. local martingale. Then all martingales N admit a
D
representation w.r.t. M if and only if

KT (M ) = L1 (⌦, FT , P) 8 T < 1. (10.2.18)
Proof. Suppose all martingales N admit a representation w.r.t. M . Given ⇠ 2 L1 (⌦, FT , P),
consider the martingale Nt = E[⇠ | Ft ]. Note that N may not be r.c.l.l. to begin with. In
view of our assumption, get f 2 L(M ) such that
Z t
Nt = N0 + f dM a.s. 8t.
0
Rt
This implies that Vt = N0 + 0 f dM is an r.c.l.l. martingale and is a version of N . Thus
by definition of KT (M ), it follows that NT = ⇠ 2 KT (M ).
Conversely, if (10.2.18) holds, then given a martingale N , fix n and let ⇠ = Nn Then
RT
⇠ 2 Kn (M ) and so we get f n 2 L(X) such that ⇠ = 0 f n dM and further that Z n =
R n
f dM is a martingale. It follows that Ztn = Nt a.s. for t  T . Let
X
fs = fsn 1(n 1,n] .
n
R
Then one can check that f 2 L(M ), Z = f dM is a martingale and Zt = Nt a.s. for all
t. Hence N admits a representation w.r.t. M .
Essentially the same proof also gives us the following.
Corollary 10.8. Let M be an r.c.l.l. local martingale. Then all bounded martingales N
admit a representation w.r.t. M if and only if
L1 (⌦, FT , P) ✓ KT 8 T < 1. (10.2.19)
T
Theorem 10.9. Let M be an r.c.l.l. local martingale on (⌦, F, P). Suppose that F0 is
trivial and F = ([t Ft ). Then the following are equivalent.
F
(i) Every bounded martingale N admits an integral representation w.r.t. M .
(ii) Every martingale N admits an integral representation w.r.t. M .

A
(iii) P is an extreme point of the convex set E(M ).
e P (M ) = {P}.
(iv) E
R
(v) EP (M ) = {P}.
Proof. We have seen that (i) is same as L1 (⌦, FT , P) ✓ KT (M ) 80 < T < 1 and (ii) is
D
same as L1 (⌦, FT , P) = KT (M ) 80 < T < 1. As seen in Theorem 10.4 KT (M ) is a closed

subspace of L1 (⌦, FT , P). Since L1 (⌦, FT , P) is dense in L1 (⌦, FT , P), it follows that (i)
and (ii) are equivalent.
On the other hand, suppose (iv) holds and suppose Q1 , Q2 2 E(M ) and P = ↵Q1 + (1
↵)Q2 . It follows that Q1 , Q2 are absolutely continuous w.r.t. P and hence Q1 , Q2 2 E e P (M ).
In view of (iv), Q1 = Q2 = P and thus P is an extreme point of E(M ) and so (iii) is true.
Thus (iv) ) (iii).
Since {P} ✓ EP (M ) ✓ E e P (M ), it follows that (iv) implies (v).
On the other hand, suppose (v) is true and Q 2 E e P (M ). Then Q1 = 1 (Q+P) 2 EP (M ).
2
Then (v) implies Q1 = P and hence Q = P. Thus (v) ) (iv) holds.
Till now we have proved (i) () (ii) and (iii) ( (iv) () (v).
To complete the proof, we will show (i) ) (v) and (iii) ) (ii).
First we come to the proof of (iii) ) (ii). Suppose P is an extreme point of E(M )
but (ii) is not true. We will show that this leads to a contradiction. Since (ii) is not
true, it follows that KT (M ) is a closed proper subspace of L1 (⌦, F, P). Since KT (M ) is
not equal to L1 (⌦, FT , P), by the Hahn-Banach Theorem, there exists ⇠ 2 L1 (⌦, FT , P),
P(⇠ 6= 0) > 0 such that Z
✓⇠ dP = 0 8✓ 2 KT (M ).
Then for c 2 R, we have

Z Z
✓(1 + c⇠)dP = ✓dP 8✓ 2 KT (M ). (10.2.20)
Since ⇠ is bounded, we can choose a c > 0 such that
T
P(c|⇠| < 0.5) = 1.
Now, let Q be the measure with density ⌘ = (1 + c⇠). Then Q is a probability measure.
Thus (10.2.20) yields Z Z
F
✓dQ = ✓dP 8✓ 2 KT (M ).
Let n " 1 be bounded stop times such that Mtn = Mt^ n

(10.2.21)
is a P-martingale. For any

A
bounded stop time ⌧ , M⌧n^T = M⌧ ^ n ^T 2 KT and hence
EQ [M⌧n^T ] = EP [M⌧n^T ] = M0 (10.2.22)
On the other hand,
R
EQ [M⌧n_T ] = EP [⌘M⌧n_T ]
= EP [EP [⌘M⌧n_T | FT ]]
= EP [⌘EP [M⌧n_T | FT ]]
D
(10.2.23)
= EP [⌘MTn ]
= EQ [MTn ]
= M0 .
where we have used the facts that ⌘ is FT measurable, M n is a P-martingale and (10.2.22).
Now noting that M⌧n = M⌧n^T + M⌧n_T MTn , we conclude
EQ [M⌧n ] = EQ [M⌧n^T ] + EQ [M⌧n_T ] EQ [MTn ] = M0 .
Thus Mtn = Mt^ n is a Q-martingale for every n so that M is a Q local martingale and
thus Q 2 E(M ). Similarly, if Q̃ is the measure with density ⌘ = (1 c⇠), we can prove
that Q̃ 2 E(M ). Here P = 12 (Q + Q̃) and P 6= Q (since P(⇠ 6= 0) > 0). This contradicts the
assumption that P is an extreme point of E(M ). Thus (iii) ) (ii).
To complete the proof we will prove (i) implies (v). Suppose (i) is true and let Q 2
EP (M ). Fix T < 1 and let ⌘ be any FT measurable bounded random variable. Since
L1 (⌦, FT , P) ✓ KT (M ) and F0 is trivial, we can get g 2 L(M ) with
Z T
⌘ =c+ gdM
0
Rt Rt
such that 0 gdM is a martingale. Let Zt = 0 gs 1[0,T ] (s)dMs . It follows that Zt =
EP [(⌘ c) | Ft ] and since ⌘ is bounded, it follows that Z is bounded. As noted earlier,
since P and Q are equivalent, the stochastic integrals under P and Q are identical. Under
R
Q, M being a local martingale and Z = f dM being bounded, we conclude invoking
Corollary 9.18 that Z is also a martingale under Q. Thus, EQ [ZT ] = 0 = EP [ZT ] and
T
thus using ⌘ = c + ZT we get EQ [⌘] = c = EP [⌘]. Since this holds for all FT measurable
bounded random variables ⌘, we conclude Q and P agree on FT . In view of the assumption
F = ([t Ft ), we get Q = P proving (v). This completes the proof.
F
We can now deduce the integral representation property for Brownian Motion, due to
Ito [24] and Clark [10].
A
Theorem 10.10. Let W be one-dimensional Brownian motion and let Ft = FtW and
F = ([t FtW ). Then every martingale M admits a integral representation
R
Z t
Mt = M0 + f dW, 8t 0 (10.2.24)
0
for some f 2 L(W ).

D
Proof. We will prove that EP (W ) = {P }. The conclusion then would follow from Theorem
10.9. If Q 2 EP (W ), then by definition, W is a Q-local martingale and [W, W ]Q t = t
P
since Q is equivalent to P and [W, W ]t = t, see Remark 4.73. Now part (v) in Theorem
5.16 implies that Wt and Wt2 t are Q-martingales and then Levy’s characterisation of
Brownian motion, Theorem 3.5 implies that W is a Brownian motion under Q. Thus for
t1 , t2 , . . . , tm 2 [0, 1) and B 2 B(Rm ),
Q((Wt1 , Wt2 , . . . , Wtm ) 2 B) = P((Wt1 , Wt2 , . . . , Wtm ) 2 B) (10.2.25)
which in turn implies P = Q since F = (Ws : s 2 [0, 1). Thus EP (W ) = {P }.

10.3. Quasi-elliptical multidimensional Semimartingales 317
10.3 Quasi-elliptical multidimensional Semimartingales

The d-dimensional version of Theorem 10.9 is not true in general. The difficulty is this:
given a sequence of martingales {N n : n 1} such that NTn is converging in L1 (say to
NT ) for every T < 1, and {g n,j : n 1} such that
d Z t
X
Ntn = N0n + g n,j dM j
j=1 0
we cannot conclude that the sequence of integrands g n,j is converging as was the case in 1-
dimensional case. See counter example in [28]. This prompts us to introduce a condition
under which the class of martingales that admit integral representation is closed under L1
convergence.
First note that for semimartingales X 1 , X 2 , . . . , X d and 1, . . . , d 2 R, defining Y =
T
Pd jXj,
j=1
d
X
i j
[Y, Y ]t = [X i , X j ]t
and hence
d
X
i j
i,j=1
([X i , X j ]t
F [X i , X j ]s ) 0 a.s. (10.3.1)
A
i,j=1
In other words, for s < t fixed, the matrix (([X i , X j ]t [X i , X j ]s )) is non-negative definite.
Definition 10.11. A d-dimensional semimartingale X = (X 1 , X 2 , . . . , X d ) is said to be

R
quasi-elliptic if there exists a sequence of stop times ⌧n " 1 and constants ↵n > 0 such that
for all 1 , . . . , d 2 R, one has
d
X d
X
D
i j i j i j
([X , X ]t [X , X ]s ) ↵n2 ( i )2 ([X i , X i ]t [X i , X i ]s ) 8s < t  ⌧n a.s.
i,j=1 i=1
(10.3.2)
Remark 10.12. Note that if X = (X 1 , X 2 , . . . , X d ) is a quasi-elliptic semimartingale on

(⌦, F, P) and Q is a probability measure absolutely continuous w.r.t. P, then X = (X 1 , X 2 , . . . , X d )
continues to be a quasi-elliptic semimartingale on (⌦, F, Q).
Example 10.13. A trivial example of quasi-elliptic semimartingale X = (X 1 , X 2 , . . . , X d ) is

when [X i , X j ] = 0 for i 6= j. This is the case when X is d-dimensional standard Brownian
motion.
Example 10.14. Let X = (X 1 , X 2 , . . . , X d ) be the solution to the SDE (3.5.1) with m = d

where , b satisfy (3.5.3) and (3.5.4). Further, suppose that 9↵ > 0 such that for all t 0,
x 2 Rd , 1 , 2 , . . . , d
Xd Xd
2
i j ij (t, x) ↵ i. (10.3.3)
i,j=1 i=1
Then it is easy to verify that X = (X 1 , X 2 , . . . , X d ) is a quasi-elliptic semimartingale.
Lemma 10.15. Let X = (X 1 , X 2 , . . . , X d ) be a quasi-elliptic semimartingale. Then for all

hj 2 L(X j ), 1  j  d, one has
d Z
X d Z
t
1 X t i j
(hjs )2 d[X j , X j ]s  2 hs hs d[X i , X j ]s 8s < t  ⌧n a.s. (10.3.4)
0 ↵n 0
j=1 i,j=1
T
where n and ↵n are as in (10.3.2).
Proof. Clearly, the assumption (10.3.2) implies that (10.3.4) is true for simple predictable
processes h1 , h2 , . . . , hd 2 S. Yow fixing h2 , . . . , hd 2 S, the class of h1 for which (10.3.4) is
F
true is seen to be bp-closed and hence by Monotone class theorem, (Theorem 2.64) contains
all bounded predictable processes. Similarly by (finite) induction on j we can show that
A
(10.3.4) is true for bounded predictable h1 , . . . , hj and hj+1 , . . . , hd 2 S, for 1  j  d.
This proves validity of (10.3.4) when h1 , h2 , . . . , hd are bounded.
Now note that by the Kunita-Watanabe inequality (Theorem 4.72) and Remark 4.79,
P
the right hand side in (10.3.4) is finite a.s. for hj 2 L(X j ), 1  j  d. Let ⌘ = dj=1 |hj |2
R
and for 1  j  d and n 1, let

hn,j = hj 1{⌘n} .
D
Using (10.3.1), it follows that

d Z
X t d Z
X t
hn,i n,j i j
s hs d[X , X ]s increases to his hjs d[X i , X j ]s
i,j=1 0 i,j=1 0
and also easy to see that

Xd Z t d Z t
X
n,j 2 j j
(hs ) d[X , X ]s increases to (hjs )2 d[X j , X j ]s .
i=1 0 i=1 0
Thus validity of (10.3.4) for {hn,j : 1  j  d} for all n 1 implies validity of (10.3.4) for
{hj 2 L(X j ) : 1  j  d}.
Corollary 10.16. Let X = (X 1 , X 2 , . . . , X d ) be a quasi-elliptic semimartingale. Suppose

g n,j 2 L(X j ), 1  j  d, n 1 are such that
Xd Z t
(gsn,i gsm,i )(gsn,j gsm,j )d[X i , X j ]s ! 0 in probability as n, m ! 1.
i,j=1 0
Then
d Z
X t
(gsn,i gsm,i )2 d[X i , X i ]s ! 0 in probability as n, m ! 1.
i,j=1 0
Proof. This follows from Lemma 2.72 and Lemma 10.15.
Note that if X 1 , X 2 , . . . , X d are semimartingales such that [X i , X j ] = 0 for i 6= j then

X = (X 1 , X 2 , . . . , X d ) is quasi-elliptic semimartingale. In particular, if X 1 , X 2 , . . . , X d
are continuous local martingales such that X i X j is also a local martingale for i 6= j, then
T
X = (X 1 , X 2 , . . . , X d ) is quasi-elliptic local martingale.
Here is the analogue of Lemma 10.3 in multidimensional case for a quasi-elliptic semi-
martingale.
F
Lemma 10.17. Let M 1 , M 2 , . . . , M d be a quasi-elliptic local martingale (each component is
a local martingale). Let N n 2 C(M 1 , M 2 , . . . , M d ) be martingales such that E[ |Ntn Nt | ] !
0 for all t. Then N 2 C(M 1 , M 2 , . . . , M d ).
A
Proof. The proof follows the steps in the proof Lemma 10.3. First we get g n,j 2 L(M j ) for
1  j  d, n 1 such that
d Z t
R
X
Ntn = N0n + g n,j dM j .
j=1 0
We then conclude that N n is converging in Emery topology and as a consequence, for all
D
T < 1,
[N n N m , N n N m ]T ! 0 in probability as n, m ! 1. (10.3.5)
Here note that
d Z
X T
n m n m
[N N ,N N ]T = (g n,j g m,j )(g n,k g m,k )d[M j , M k ]. (10.3.6)
j,k=1 0
Now (10.3.5), (10.3.6), the assumption that M 1 , M 2 , . . . , M d is a quasi-elliptic local mar-

tingale and Lemma 10.16 implies that for each j, 1  j  d
Z T
(gsn,j gsm,j )2 d[M, M ]s ! 0 in probability as n, m ! 1. (10.3.7)
0
Now, by taking a subsequence, if necessary and relabeling, we assume that for 1  k  n,

1jd
Z k
1 1 1
P(( (gsn,j gsk,j )2 d[M, M ]s ) 2 k
)  k. (10.3.8)
0 2 2
Proceeding as in the proof of Lemma 10.3, defining
gsj (!) = lim sup gsk,j (!)
k!1
we can conclude that
Z t d Z
X t
[N, N ]t = gsj gsk d[M j , M k ]s .
0 j,k=1 0
Getting n " 1 such that (10.2.11) holds and invoking the assumption that M 1 , . . . , M d
is quasi- elliptic, we conclude
Z n ^⌧n
T
1
E[( (gsn,j )2 d[M j , M j ]s ) 2 ] < 1 1  j  d, n 1.
0
P Rt
Thus gj
2 Now defining Yt = N0 + dj=1 0 g j dM j , we can show that (10.2.12)
L(M j ).
and (10.2.13) hold and thus N = Y completing the proof that N 2 C(M 1 , M 2 , . . . , M d ).
F
Now the same proof as that of Theorem 10.4 gives us the following.
A
Theorem 10.18. For local martingales M 1 , M 2 , . . . , M d and T < 1 let
KT (M 1 , M 2 , . . . , M d ) = {NT : N 2 C(M 1 , M 2 , . . . , M d ) \ M}. (10.3.9)
R
Suppose M 1 , M 2 , . . . , M d is quasi-elliptic local martingale. Then KT (M 1 , M 2 , . . . , M d ) is

a closed linear sub-space of L1 (⌦, FT , P).
We are now ready to prove the multidimensional version of the Theorem 10.9.
D
Theorem 10.19. Let M = (M 1 , M 2 , . . . , M d ) be quasi-elliptic local martingale on (⌦, F, P).

Suppose that F0 is trivial and F = ([t Ft ). Then the following are equivalent.
(i) For every bounded martingale N , 9f j 2 L(M j ), 1  j  d such that

X d Z t
Nt = N0 + fsj dMsj a.s. 8t. (10.3.10)
j=1 0
(ii) For every martingale N , 9f j 2 L(M j ), 1  j  d such that (10.3.10) is true.
(iii) P is an extreme point of the convex set E(M 1 , M 2 , . . . , M d ).

e P (M 1 , M 2 , . . . , M d ) = {P}.
(iv) E
(v) EP (M 1 , M 2 , . . . , M d ) = {P}.
Proof. The proof closely follows that of Theorem 10.9. Once again we can observe that
(i) is same as L1 (⌦, FT , P) ✓ KT (M 1 , M 2 , . . . , M d ) 80 < T < 1 and (ii) is same as
L1 (⌦, FT , P) = KT (M 1 , M 2 , . . . , M d ) 80 < T < 1.
Proofs of (i) () (ii) and (iii) ( (iv) () (v) are exactly the same.
In the proof of (i) ) (v) is also on similar lines, invoking Theorem 10.18 in place of
Theorem 10.4 to conclude that the class of FT measurable random variables that admit
representation is a closed subspace of L1 (⌦, F, P).
For the proof of the last part, namely (i) implies (v), assume (i) is true and let Q 2 MP .
Let Q 2 EP (M 1 , M 2 , . . . , M d ).
T
Fix T < 1 and let ⌘ be any FT measurable bounded random variable. Since L1 (⌦, FT , P) ✓
KT (M 1 , M 2 , . . . , M d ) and F0 is trivial, we can get g j 2 L(M j ) for 1  j  d with
d Z
X
P Rt
⌘ =c+
F
j=1 0
T
g j dM j
P Rt
such that Vt = c + dj=1 0 g j dM j is a P-martingale. Let Zt = dj=1 0 gsj 1[0,T ] (s)dMsj .
A
Then Zt = E[(⌘ c) | Ft ] and thus Z is a bounded P-martingale.
Since M 1 , M 2 , . . . , M d are Q-local martingales and g j 2 L(M j ), it follows that Z is
a Q-sigma-martingale. But Z is a bounded process and now invoking Corollary 9.26 we
R
conclude that Z is a Q-martingale. The rest of the proof that Q = P is exactly as in

Theorem 10.9.
D
We can now deduce the integral representation property for d-dimensional Brownian
Motion, due to Ito [24] and Clark [10].
Theorem 10.20. Let W = (W 1 , W 2 , . . . , W d ) be d-dimensional Brownian motion.Thus

each W j is a real-valued Brownian motion and W 1 , W 2 , . . . , W d are independent. Let
Ft = FtW and F = ([t Ft ). Then every martingale M admits a representation
d Z
X t
Mt = M0 + f j dW j 8t (10.3.11)
j=1 0
where f j 2 L(W j ) for 1  j  d.

Proof. The proof is on the same lines as in the case of 1-dimensional version, Theorem 10.10.
First we note that [W j , W k ] = 0 for j 6= k implies that W is a quasi-elliptic semimartingale
so that we can use Theorem 10.19. We will show that if Q 2 EP (W 1 , W 2 , . . . , W d ) then
Q = P. Once again as in Theorem 10.10, we deduce that for each j W j is a square integrable
martingale with [W j , W j ]Q j j Q
t = t and for j 6= k, [W , W ]t = 0. Thus Levy’s characterisa-
tion Theorem 3.6 implies that W is a d-dimensional Brownian motion on (⌦, F, Q). The
assumption that F is generated by {Wt : t 0} yields P = Q completing the proof
Example 10.21. Let W = (W 1 , W 2 , . . . , W d ) be d-dimensional Brownian motion.Thus each

W j is a real-valued Brownian motion and W 1 , W 2 , . . . , W d are independent. Let Ft = FtW
and F = ([t Ft ). Let X = (X 1 , X 2 , . . . , X d ) be the solution to the SDE (3.5.1) with m = d
and b = 0 where satisfies (3.5.3), (3.5.4). Further, suppose that 9↵ > 0 such that for all
t 0, x 2 Rd , 1 , 2 , . . . , d
T
d
X d
X
2
i j ij (t, x) ↵ i. (10.3.12)
i,j=1 i=1
Wt =
F
Then as noted earlier, X = (X 1 , X 2 , . . . , X d ) is a quasi-elliptic semimartingale. Moreover, the
condition (10.3.12) implies that (t, x) is invertible and then
Z t
1
(s, Xs )dXs . (10.3.13)
A
0
Thus, Wt is FtX
measurable and as a consequence, FtX = Ft and as a consequence, every
martingale M admits a representation
d Z t
R
X
M t = M0 + g j dX j 8t (10.3.14)
j=1 0
where g j 2 L(X j ) for 1  j  d- just define gs = fs 1 (s, Xs ) where f is as in (10.3.11).

D
Since (F·X ) = (F· ), g above is also (F·X )-predictable. As a consequence, we also get that
EP (X 1 , X 2 , . . . , X d ) = {P}.
10.4 Continuous Multidimensional Semimartingales

We will show that when X 1 , X 2 , . . . , X d are continuous semimartingales, we can get bounded
predictable processes f ij such that Y = (Y 1 , . . . , Y d ) defined by
Xd Z t
Yti = f ij dX j
j=1 0
10.4. Continuous Multidimensional Semimartingales 323
satisfies for j 6= k
[Y j , Y k ]t = 0 8t
and thus is quasi-elliptic. As a result, Theorem 10.19 would hold for (Y 1 , . . . , Y d ) if
X 1 , . . . , X d were local martingales.
We will first show that such a transformation is always possible. In order to achieve
this, we need some auxiliary results.
Lemma 10.22. Let N[d] , O[d] , D[d] be the class of d ⇥ d symmetric non-negative definite
matrices, d ⇥ d Orthogonal matrices and d ⇥ d diagonal matrices. Then There exists a
Borel measurable mapping ✓ : N[d] 7! O[d] ⇥ D[d] such that
✓(C) = (B, D) satisfies C = B T DB.
Proof. Given a non-negative definite C, the eigenvalue-eigenvalue decomposition gives ex-
T
istence of orthogonal B and diagonal D such that C = B T DB. Since for all C 2 N[d] , the
set
{(B, D) 2 O[d] ⇥ D[d] : C = B T DB}
F
is compact, measurable selection theorem (See [19] or or Corollary 5.2.6 of [54]) yields the
existence of Borel measurable ✓.
A
Lemma 10.23. Let D be a -field on a non-empty set and for 1  i, j  d, ij be -finite
signed measures on ( , D) such that for all E 2 D, the matrix(( ij (E))) is a symmetric
P
non-negative definite matrix. Let ⇤(E) = di=1 ii (E). Then for 1  i, j  d there exists
R
d
a version cij of the Radon-Nikodym derivative d⇤ij such that for all 2 , the matrix
((cij ( ))) is non- negative definite.
d ij
Proof. or 1  i  j  d let f ij be a version of the Radon-Nikodym derivative and let
D
d✓
f ji = f ij . For rationals r1 , r2 , . . . , rd , let
X
Ar1 ,r2 ,...,rd = { : ri rj f ij ( ) < 0}.
ij
Then ✓(Ar1 ,r2 ,...,rd ) = 0 and hence ✓(A) = 0 where

A = [{Ar1 ,r2 ,...,rd : r1 , r2 , . . . , rd rationals}.
The required version is now given by
cij ( ) = f ij ( )1Ac ( ).
We are now ready to prove
Theorem 10.24. Let M 1 , M 2 , . . . , M d be continuous semimartingales. We can get pre-

dictable processes bij bounded by 1 such that N = (N 1 , . . . , N d ) defined by
Xd Z t
j
Nt = bji dM i (10.4.1)
i=1 0
satisfies
[N j , N k ]t = 0 8t. (10.4.2)
Further,
d Z
X t
Mtk = bjk dN j . (10.4.3)
j=1 0
T
Proof. First let us assume that [M k , M k ]t  C for all t and 1  k  d. Recall that the
predictable -field P is the smallest -field on ⌦ e = [0, 1) ⇥ ⌦ with respect to which all
continuous adapted processes are measurable.
Pd
ij (E) =
Z Z 1
⌦ 0
F
Let signed measures ij on P be defined as follows: for E 2 P, 1  i, j  d,
1E (s, !)d[M i , M j ]s (!)dP(!).

A
Let ⇤ = j=1 jj . From the properties of quadratic variation [M i , M j ], it follows that
for all E 2 P, the matrix (( ij (E))) is non-negative definite. Further, ij is absolutely
continuous w.r.t. ⇤ 8i, j. It follows that we can get predictable processes cij such that
R
d ij
= cij (10.4.4)
d⇤
and that C = ((cij )) is a non-negative definite matrix (see Lemma 10.23). By construction
|cij |  1. Using Lemma 10.22, we can obtain obtain predictable processes bij , dj such that
D
for all i, k, (writing ik = 1 if i = k and ik = 0 if i 6= k),)
d
X
bij kj
s bs = ik (10.4.5)
j=1
d
X
bji jk
s bs = ik (10.4.6)
j=1
d
X
bij jl kl
s c s bs =
i
ik ds (10.4.7)
j,l=1
10.4. Continuous Multidimensional Semimartingales 325
Since ((cij i
s )) is non-negative definite, it follows that ds 0. For 1  j  d, let N j be
defined by (10.4.1). Using (10.4.6), it follows that
d Z
X t Z tX
d X
d
jk j
b dN = bjk bji
s dM
i
j=1 0 0 j=1 i=1 . (10.4.8)

= Mtk
Note that
d Z
X t
i k
[N , N ]t = bij kl j l
s bs d[M , M ]s
j,l=1 0
and hence for any bounded predictable process h for i 6= k

Z 1 Z Z 1 d
X
i k
EP [ hs d[N , N ]s ] = hs bij kl j l
s bs d[M , M ]s dP(!)
T
0 ⌦ 0 j,l=1
Z d
X
= h bij bkl d jl
¯
⌦ (10.4.9)
=
Z
¯
⌦
h
j,l=1
d
X
j,l=1
F
bij bkl cjl d⇤
A
=0
where the last step follows from (10.4.7). Given a bounded stop time , taking h =
1(0, ] , it follows that h is predictable and thus using (10.4.9) we conclude Taking hs (!) =
R
1A (!)1(u,t] (s) where A 2 Fu , 0  u < t, we conclude from (10.4.9) that for i 6= k
E[ [N i , N k ] ] = 0.
D
Thus [N i , N k ] is a martingale for i 6= k (see Theorem 2.55). It is a continuous process

(as N j are continuous) with bounded variation and [N i , N k ]0 = 0 by definition. Hence it
follows (see Corollary 5.19) that [N i , N k ]t = 0. Thus we have proved the result for the case
when [M k , M k ]t are bounded. For the general case, let
d
X
n = inf{t 0 [M j , M j ]t n}.
j=1
[n],k
Then n " 1 and for each n, M [n],1 , M [n],2 , . . . , M [n],d defined by Mt k
= Mt^ n
satisfy
[M [n],k , M [n],k ]t is bounded for 1  k  d.

Let ((b[n],ij )) be the predictable processes obtained for M [n],1 , M [n],2 , . . . , M [n],d . Then
defining
1
X
bij
s = b[n],ij 1( n 1 , n ] (s)
n=1
we can verify that N defined by (10.4.1) satisfies (10.4.2) and (10.4.3).
Remark 10.25. Let M, N be as in Theorem 10.24. Then it follows that M 1 , . . . , M d are local
martingales if and only if N 1 , . . . , N d are local martingales since bik are bounded predictable
processes. Further, 10.4.1, 10.4.3 imply that
E(M 1 , M 2 , . . . , M d ) = E(N 1 , N 2 , . . . , N d ),
EP (M 1 , M 2 , . . . , M d ) = EP (N 1 , N 2 , . . . , N d ),
e P (M 1 , M 2 , . . . , M d ) = E
E e P (N 1 , N 2 , . . . , N d ).
T
In view of Remark 10.25, we have the following result as a direct consequence of The-
orem 10.19.
F
Theorem 10.26. Let M 1 , M 2 , . . . , M d be continuous local martingales on (⌦, F, P). Sup-
pose that F0 is trivial and F = ([t Ft ). Let N 1 , N 2 , . . . , N d be as in Theorem 10.24 so
that (10.4.1),(10.4.2) and (10.4.3) hold. Then the following are equivalent.
A
(i) For every bounded martingale u, 9f j 2 L(N j ), 1  j  d such that
Xd Z t
Ut = U0 + fsj dNsj 8t. (10.4.10)
R
j=1 0
(ii) For every martingale N , 9f j 2 L(N j ), 1  j  d such that (10.4.10) is true.

D
e P (M 1 , M 2 , . . . , M d ) = {P}.
(iv) E
(v) EP (M 1 , M 2 , . . . , M d ) = {P}.
10.5 General Multidimensional case

We have commented that in general, the multidimensional version of Theorem 10.9 is not
true. In view of this, we had given a version under additional conditions (Theorem 10.19)
and a version in the case of continuous semimartingales.
10.5. General Multidimensional case 327
For semimartingales X 1 , . . . , X d and hj 2 L(X j ), we can define the vector stochastic

integral as follows
Z t Xd Z
hh, dXi = hj dX j .
0 j=1
In order to discuss the general case of integral representation theorem, we need to extend
the notion of vector stochastic integral. See Jacod [26], Cherny and Shiryaev[7].
Definition 10.27. For semimartingales X 1 , . . . , X d , let Lv (X 1 , . . . , X d ) denote the class

of Rd -valued predictable processes h = (h1 , . . . hd ) such that for any sequence of predictable
processes n such that
(i) | n|  1,
T
(ii) hj n is bounded for all j, n, 1  j  d, n 1,
(iii) n ! 0 pointwise
the processes Z n =
Pd
Here is an observation.
j=1
R
hj n dX j
F
converge to 0 in ducp metric.
A
Lemma 10.28. Let X 1 , . . . , X d be semimartingales and h = (h1 , . . . , hd ) be an Rd -valued
predictable process. Let
Xd Z
1
R
h
Y = hj dX j (10.5.1)
|h|
j=1
Pd j )2 1
where |h| = j=1 (h and hj |h| is taken to be 0 by convention when hj = 0. Then
D
h 2 Lv (X 1 , . . . , X d ) if and only if |h| 2 L(Y h ) (10.5.2)
Proof. Let h 2 Lv (X 1 , . . . , X d ). Let f n be bounded predictable processes with | f n | |h|

1
and f n ! 0 pointwise. Let n = f n 1{|h|6=0} |h| . Then n are predictable processes with
R P R
| n |  1 and n ! 0 pointwise. Also, f n = n |h| and so f n dY h = dj=1 hj n dX j .
R
Thus, f n dY h ! 0 in ducp metric and thus |h| 2 L(Y h ) (see Theorem 4.17).
Conversely, suppose |h| 2 L(Y h ). Given predictable n as in definition 10.27, let
f n = |h| n . Then |f n |  |h| and f n ! 0 pointwise and hence
Z
W = f n dY h ! 0 ducp metric.
n
Noting that
Z d Z
X
f n dY h = hj n
dX j
j=1
we conclude that h 2 Lv (X 1 , . . . , X d ).
Definition 10.29. For semimartingales X 1 , . . . , X d and h 2 Lv (X 1 , . . . , X d ), the vector

Rt
stochastic integral 0 hh, dXi is defined by
Z t Z t
hh, dXi = |hs |dYsh
0 0
where Y h is defined in (10.5.1).
We introduce the class of semimartingales that admit a representation as vector integral
T
w.r.t. X = (X 1 , . . . , X d ). Let
Z t
v 1 d 1 d
C (X , . . . , X ) = {Y : 9g 2 Lv (X , . . . , X ), with Yt = Y0 + hg, dXi 8t < 1}
Note that if Zt =
Rt
0 hh,dXi, then
Z t
F 0
A
[Z, Z]t = |hs |2 d[Y h , Y h ]s
0
d Z
X t
1
= |hs |2 (hj hk )d[X j , X k ]s
|hs |2 s s (10.5.3)
j,k=1 0
R
d Z
X t
= (hjs hks )d[X j , X k ]s .
j,k=1 0
Rt
D
Likewise, for h 2 Lv (X 1 , . . . , X d ) and g 2 Lv (Y 1 , . . . , Y d ), Zt = 0 hh, dXi and Wt =

Rt
0 hg, dY i, we have
Xd Z t
[Z, W ]t = (hjs gsk )d[X j , Y k ]s . (10.5.4)
j,k=1 0
Remark 10.30. Let X 1 , . . . , X d be semimartingales and let hj 2 L(X j ) for 1  j  d. Then

it is easy to see that h = (h1 , . . . , hd ) 2 Lv (X 1 , . . . , X d ) and
Z d Z
X
hh, dXi = hj dX j .
j=1
Remark 10.31. Let X 1 , . . . , X d be semimartingales and let h 2 Lv (X 1 , . . . , X d ). For any

predictable process such that > 0 and | h | , we have
Z t Z t
h,
hh, dXi = s dZ (10.5.5)
0 0
where
d Z
X t
hj
Zth, = dX j . (10.5.6)
j=1 0
Here is an observation about vector integral, an analogue of Theorem 4.29.
Theorem 10.32. Let X 1 , . . . , X d be semimartingales and let be a (0, 1)-valued pre-

R
dictable process such that 2 L(X ) for 1  j  d. Let Y =
j j dX j , Let h =
(h1 , h2 , . . . , hd ), f j = hj , f = (f 1 , f 2 , . . . , f d ). Then
T
h 2 Lv (X 1 , X 2 , . . . , X d ) if and only if f 2 Lv (Y 1 , Y 2 , . . . , Y d ) (10.5.7)
and then Z Z
hh, dXi = hf, dY i. (10.5.8)
As a consequence F
Cv (X 1 , X 2 , . . . , X d ) = Cv (Y 1 , Y 2 , . . . , Y d ). (10.5.9)
A
hj gj
Proof. Since |h| = |g| ,
d Z
X
h hj
Z = dX j
|h|
R
j=1
Xd Z
gj
= dY j
|g|
j=1
Z
D
= dY g
Pd R gj
where Y g = j=1
j
|g| dY .
We observe that an analogue of Theorem 4.39 holds for vector integral as well.
Theorem 10.33. Let X 1 , X 2 , . . . , X d be stochastic integrators and f 1 , f 2 , . . . , f d be pre-

dictable processes such that there exist stop times ⌧m increasing to 1 with
(f 1 1[0,⌧m ] , . . . , f 1 1[0,⌧m ] ) 2 Lv (X 1 , . . . , X d ) 8n 1. (10.5.10)
Then (f 1 , f 2 , . . . , f d ) 2 Lv (X 1 , . . . , X d ).
Proof. Let n be predictable processes, | n |  1, hj n is bounded for all j, n, 1  j  d,

n 1, n ! 0 pointwise. Then in view of (10.5.10), it follows that for each n,
Xd Z
m,n
Z = hj 1[0,⌧m ] n dX j ! 0 in ducp metric. (10.5.11)
j=1
We need to show that

d Z
X
Zn = hj n
dX j ! 0 in ducp metric. (10.5.12)
j=1
By (4.4.2) in Lemma 4.32, it follows that
Ztm,n = Zt^⌧
n
m
.
Now the required conclusion, namely (10.5.12) follows from (10.5.11) and Corollary (2.73).
T
R
Exercise 10.34. Show that the mapping (h, X) 7! hh, dXi is linear in h and X.
F
In analogy with Lemma 10.1, here we have the following result, with very similar proof.
Lemma 10.35. Let Y be a semimartingale such that for a sequence of stop times ⌧n " 1,
A
Y n defined by Ytn = Yt^⌧n satisfies
Y n 2 Cv (X 1 , X 2 , . . . , X d ).
Then
R
Y 2 Cv (X 1 , X 2 , . . . , X d ).
Proof. Let f n,j 2 L(X j ), 1  j  d, n 1 be such that for all n,

D
Z t
Ytn n
= Y0 + hf n , dXi.
0
Define f j by
1
X
fj = 1(⌧n 1 ,⌧n ]
f n,j .
n=1
Then it is easy to check (using Theorem 10.33) that f j 2 L(X j ) and

Z t
Yt = Y0 + hf, dXi.
0
With the introduction of vector integral, we can now prove the multidimensional ana-
logue of Lemma 10.3.
Lemma 10.36. Let M 1 , M 2 , . . . , M d be local martingale (each component is a local mar-

tingale). Let X n 2 Cv (M 1 , M 2 , . . . , M d ) be martingales such that E[ |Xtn Xt | ] ! 0 8t.
Then X 2 Cv (M 1 , M 2 , . . . , M d ).
Proof. The proof follows the steps in the proof Lemma 10.3. We note that Theorem 5.33
implies that X n is converging to X in Emery topology and as a consequence, for each T ,
[X n X, X n X]T ! 0 in probability as n ! 1, (10.5.13)
[X n , X n ]T ! [X, X]T in probability as n ! 1 (10.5.14)
and
[X n X m, X n X m ]T ! 0 in probability as n, m ! 1.
T
(10.5.15)
By taking a subsequence and relabeling if necessary, we assume that
P([X n X, X n X]k 2 k
)2 k
, 8n, m k. (10.5.16)
1 p
X
[X n X, X n X]t < 1 a.s.
F
Using this estimate and invoking Borel-Cantelli lemma it follows that
A
n=1
Let
d q
X 1 p
X p
Bt = [M j , M j ]t + [X n X, X n X]t + [X, X]t
R
j=1 n=1
p
Using (4.6.22), it follows that [X n , X n ]t  Bt and also
p
[X n X m , X n X m ]t  Bt (10.5.17)
D
We are going to carry out a orthogonalization as in Theorem 10.24. However, this time
[M j , M k ]
are not continuous and thus we cannot assume them to be locally integrable.
Thus we introduce an equivalent measure Q as follows: let
bn = EP [exp { Bn }],
1
X 1
⇠= exp { Bn }
2n a n
n=1
and Q be the probability measure on (⌦, F) defined by
dQ
= ⇠.
dP
Since EQ [(Bt )k ] < 1 for all t and for all k, and [X n X m , X n X m ]t converges to 0 in P
and hence in Q probability as n, m ! 1, it follows using (10.5.17) that
EQ [ [X n X m, X n X m ]T ] ! 0 as n, m ! 1. (10.5.18)
Likewise
EQ [ [X n X, X n X]T ] ! 0 as n ! 1 (10.5.19)
and
EQ [ [X n , X n ]T ] ! EQ [ [X, X]T ] as n ! 1. (10.5.20)
Since X n 2 Cv (M 1 . . . , M d ), we can get f n = (f n,1 , . . . , f n,d ) 2 Lv (M 1 . . . , M d ) such that

Z t
n n
Xt = X0 + hf n , dM i. (10.5.21)
0
We repeat the construction that we carried out in proof of Lemma 10.23, with a subtle dif-
T
ference. Here we do not have continuity of [M i , M j ] but do have integrability of [M j , M j ]T
under probability measure Q for each j.
Let signed measures on P be defined as follows: for E 2 P, 1  i, j  d,
Pd
ij
ij
(E) =
Z Z 1
⌦ 0
F
1E (s, !)d[M i , M j ]s (!)dQ(!).
A
Let ⇤ = j=1 jj . From the properties of quadratic variation [M i , M j ], it follows that
for all E 2 P, the matrix (( ij (E))) is non-negative definite. Further, ij is absolutely
continuous w.r.t. ⇤ 8i, j. It follows that we can get predictable processes cij such that
d ij
R
= cij (10.5.22)
d⇤
and that C = ((cij )) is a non-negative definite matrix (see Lemma 10.23). By construction
|cij |  1. Using Lemma 10.22, we can obtain obtain predictable processes bij , dj such that
D
for all i, k, (writing ik = 1 if i = k and ik = 0 if i 6= k),)
d
X
bij kj
s bs = ik (10.5.23)
j=1
d
X
bji jk
s bs = ik (10.5.24)
j=1
d
X
bij jl kl
s c s bs =
i
ik ds (10.5.25)
j,l=1
Since ((cij
s )) is non-negative definite, it follows that ds
i 0. For 1  j  d, let N j be
defined by
Xd Z t
j
Nt = bji dM i (10.5.26)
i=1 0
Using (10.5.24), it follows that

Xd Z t Z tX
d X
d
bjk dN j = bjk bji
s dM
i
j=1 0 0 j=1 i=1 . (10.5.27)

= Mtk
Note that
d Z
X t
i k
[N , N ]t = bij kl j l
s bs d[M , M ]s
j,l=1 0
and hence for any bounded predictable process h for i 6= k
T
Z 1 Z Z 1 d
X
i k
EQ [ hs d[N , N ]s ] = hs bij kl j l
s bs d[M , M ]s dQ(!)
0 ⌦ 0 j,l=1
Z
=
Z
¯
⌦
h
d
X
j,l=1
d
X
F
bij bkl d jl
(10.5.28)
A
= h bij bkl cjl d⇤
¯
⌦ j,l=1
=0
R
where the last step follows from (10.5.25). As a consequence, for bounded predictable hi ,
for T < 1
Xd Z T d Z T
X
i k i k
EQ [ hs hs d[N , N ]s ] = EQ [ (hks )2 d[N k , N k ]s ] (10.5.29)
D
i,k=1 0 k=1 0
Let us observe that (10.5.29) holds for any predictable processes {hi : 1  i  d} provided
the right hand side if finite: we can first note that it holds for h̃i = hi 1{|h|c} where
P
|h| = di=1 |hi | and then let c " 1.
Let us define
Xd
n,k
g = f n,j bkj (10.5.30)
j=1
n
Pd
and let = k=1 (|g n,k | + |f n,k |).Then note that
Z Z
n n
hg , dN i = dW n
where
d Z Z
X
n g n,k
W = n
dN k .
k=1
Note that
d Z
d X
X
n 1
W = n
f n,j bkj dN k
k=1 j=1
d X
X d Z
d X
1
= n
f n,j bkj bkl
s dM
l
(10.5.31)
k=1 j=1 l=1
d Z
X 1
= n
f n,j dM j
j=1
and hence
T
Z Z
hf n , dM i = n
dW n .
Thus we have Z Z
Thus
d Z
n
hg , dN i =
F hf n , dM i (10.5.32)
A
X T
n m n m
[X X ,X X ]T = (g n,j g m,j )(g n,k g m,k )d[N j , N k ]. (10.5.33)
j,k=1 0
Now invoking (10.5.28) we get

R
d Z
X T
n m n m
EQ [ [X X ,X X ] T ] = EQ [ (gsn,k gsm,k )2 d[N k , N k ]s ]
k=1 0
(10.5.34)
XZ
d
D
n,k m,k 2
= (g g ) 1⌦⇥[0,T ] d kk
k=1
Since left hand side in (10.5.34) converges to 0 (see (10.5.18)), invoking completeness of
¯ P, kk ), we can get predictable processes g k such that
L2 (⌦,
Z
(g n,k g k )2 1⌦⇥[0,T ] d kk ! 0.
As a consequence
X d Z T
(g n,j g j )(g n,k g k )d[N j , N k ] ! 0 in Q - probability as n ! 1, (10.5.35)
j,k=1 0
and thus for any bounded stop time ⌧

Xd Z ⌧ d Z ⌧
X
(g n,j )(g n,k )d[N j , N k ] ! (g j )(g k )d[N j , N k ] in Q - probability as n ! 1,
j,k=1 0 j,k=1 0
(10.5.36)
Pd R⌧
Noting that [X n , X n ] ⌧ = j,k=1 0 (g n,j )(g n,k )d[N j , N k ] and Q and P being equivalent, we
conclude that
d Z
X t
n n
[X , X ]t ! (g j )(g k )d[N j , N k ] in P - probability as n ! 1. (10.5.37)
j,k=1 0
d Z
X t
[X, X]t = (g j )(g k )d[N j , N k ] (10.5.38)
j,k=1 0
T
Let us define bounded predictable processes j and predictable process hn , h and a P-
martingale X as follows:
d
X
hs = 1 + |gsi | (10.5.39)
j
s
F
=
i=1
gsj
hs
(10.5.40)
A
d Z
X t
j j
Zt = s dNs (10.5.41)
j=1 0
R
Then
X d Z
d X t
j ji i
Zt = s bs dM (10.5.42)
i=1 j=1 0
D
Since j , bji are predictable and bounded by 1, it follows that Z is a P-martingale. Let us
note that
Z t d X
X d
h2s d[Z, Z]s = h2s js ks d[N j , N k ]s
0 j=1 k=1
(10.5.43)
d X
X d
= gsk gsj d[N j , N k ]s .
j=1 k=1
Putting together (10.5.38) and (10.5.43), we conclude

Z t
[X, X]t = h2s d[Z, Z]s (10.5.44)
0
We now forget Q and focus only on P. Since X is a martingale, we can get stop times
n " 1 such that E[ [X, X] n ] < 1 and thus using (10.5.44), we conclude that h 2 Lm (Z).
1
Rt Rt
Defining Yt = X0 + 0 hdZ, we note that Yt = X0 + 0 < g, dN >. Thus Y is a local
martingale and further
Z t X
d Z T
n n
[X Y, X Y ]t = (g n,j g j )(g n,k g k )d[N j , N k ]. (10.5.45)
0 j,k=1 0
and thus using (10.5.35) and the observation that Q and P are equivalent, we conclude
[X n Y, X n Y ]t ! o in P probability as n ! 1. (10.5.46)
Since for all n 1
p p p
[X Y, X Y ]t  [X n X, X n X]t + [X n Y, X n Y ]t (10.5.47)
using (10.5.34) and (10.5.13), we conclude
T
[X Y, X Y ]t = 0 8t. (10.5.48)
Since X, Y are local martingales and X0 = Y0 , (10.5.48) implies Xt = Yt for all t. To
complete the proof, we will show that
Xt = X0 +
for a suitably defined f . So let

Z t
hg, dN i = X0 +
Z t
0
hf, dM i
F 0
A
d
X
i
f = g k bki
k=1
Pd
(|f j | |g j |).
R
and let = j=1 + Then

d Z
X t
1
W = f i dM i
i=1 0
D
Xd Xd Z t
1
= f i bji dN j
i=1 j=1 0
d X
X d Z
d X t
1
= g k bki bji dN j
i=1 k=1 j=1 0
X d Z
d X t
1
= gk jk dN
j
k=1 j=1 0
d Z
X t
1
= g j dN j
j=1 0
Thus Z Z Z
hf, dM i = dW = hg, dN i.
Thus Z t
Xt = X0 + hf, dM i.
0
For semimartingales X 1 , X 2 , . . . , X d let KvT (X 1 , . . . , X d ) be defined by

KvT (X 1 , . . . , X d ) = {NT : N 2 Cv (X 1 , . . . , X d ) \ M}. (10.5.49)
Note that if P and Q are equivalent probability measures, the same is not true for KvT as
the class of martingales M is not the same under the two measures.
As an immediate consequence of Lemma 10.36 we have
T
Theorem 10.37. Let M 1 , . . . , M d be local martingales and T < 1. Then KvT (M 1 , . . . , M d )
is a closed linear sub-space of L1 (⌦, FT , P).
F
Now using Theorem 10.18 instead of Theorem 10.37, we can obtain this result on the
integral representation property for general multidimensional local martingales - rest of the
argument is essentially same as in the proof of Theorem 10.19, but we will give it here.
A
Theorem 10.38. Let M 1 , M 2 , . . . , M d be local martingales on (⌦, F, P). Suppose that F0
is trivial and F = ([t Ft ). Then the following are equivalent.
(i) For every bounded martingale S 9f 2 Lv (M 1 , M 2 , . . . , M d ) such that

R
Z t
St = S0 + hf, dM i a.s. 8t. (10.5.50)
0
(ii) For every martingale S 9f 2 Lv (M 1 , M 2 , . . . , M d ) such that (10.5.50) is true.

D
e P (M 1 , M 2 , . . . , M d ) = {P}.
(iv) E
(v) EP (M 1 , M 2 , . . . , M d ) = {P}.
Proof. It can be seen that (i) is same as L1 (⌦, FT , P) ✓ KvT (M 1 , . . . , M d ) 80 < T < 1
and (ii) is same as L1 (⌦, FT , P) = KvT (M 1 , . . . , M d ) 80 < T < 1. As seen in Theorem
10.18 KvT (M 1 , . . . , M d ) is a closed subspace of L1 (⌦, FT , P). Since L1 (⌦, FT , P) is dense
in L1 (⌦, FT , P), it follows that (i) and (ii) are equivalent.
On the other hand, suppose (iv) holds and suppose Q1 , Q2 2 E(M 1 , M 2 , . . . , M d ) and
P = ↵Q1 + (1 ↵)Q2 . It follows that Q1 , Q2 are absolutely continuous w.r.t. P and hence
Q1 , Q2 2 E e P (M 1 , M 2 , . . . , M d ). In view of (iv), Q1 = Q2 = P and thus P is an extreme
point of E(M 1 , M 2 , . . . , M d ) and so (iii) is true. Thus (iv) ) (iii).
Since {P} ✓ EP (M 1 , M 2 , . . . , M d ) ✓ E e P (M 1 , M 2 , . . . , M d ), it follows that (iv) implies
(v).
If (v) is true and Q 2 E e P (M 1 , M 2 , . . . , M d ), then Q1 = 1 (Q+P) 2 EP (M 1 , M 2 , . . . , M d ).
2
Then (v) implies Q1 = P and hence Q = P. Thus (v) ) (iv) holds.
To see that (iii) ) (ii) let P be an extreme point of E(M 1 , M 2 , . . . , M d ) but (ii) is
not true. Then KvT (M 1 , . . . , M d ) is a closed proper subspace of L1 (⌦, F, P) and by the
Hahn-Banach Theorem, there exists ⇠ 2 L1 (⌦, FT , P), P(⇠ 6= 0) > 0 such that
Z
✓⇠ dP = 0 8✓ 2 KvT (M 1 , . . . , M d ).
T
Then for c 2 R, we have
Z Z
✓(1 + c⇠)dP = ✓dP 8✓ 2 KvT (M 1 , . . . , M d ). (10.5.51)
Since ⇠ is bounded, we can choose a c > 0 such that F

P(c|⇠| < 0.5) = 1.
A
Now, let Q be the measure with density ⌘ = (1 + c⇠). Then Q is a probability measure.
Thus (10.5.51) yields
Z Z
✓dQ = ✓dP 8✓ 2 KvT (M 1 , . . . , M d ). (10.5.52)
R
Let n " 1 be bounded stop times such that Mtj,n = Mt^ j

n
is a P-martingale. For any
bounded stop time ⌧ , M⌧j,n j
^T = M⌧ ^ n ^T 2 KT and hence
D
EQ [M⌧j,n j,n j
^T ] = EP [M⌧ ^T ] = M0 (10.5.53)
On the other hand,
EQ [M⌧j,n j,n
_T ] = EP [⌘M⌧ _T ]
= EP [EP [⌘M⌧j,n
_T | FT ]]
= EP [⌘EP [M⌧j,n
_T | FT ]]
(10.5.54)
= EP [⌘MTj,n ]
= EQ [MTj,n ]
= M0j .
10.6. Integral Representation w.r.t. Sigma-Martingales 339
where we have used the facts that ⌘ is FT measurable, M j,n is a P-martingale and (10.5.53).
Now noting that M⌧j,n = M⌧j,n j,n
^T + M⌧ _T MTj,n , we conclude
EQ [M⌧j,n ] = EQ [M⌧j,n j,n
^T ] + EQ [M⌧ _T ] EQ [MTj,n ] = M0j .
Thus Mtj,n = Mt^ j
n
is a Q-martingale for every n so that M j is a Q local martingale and
thus Q 2 E(M 1 , M 2 , . . . , M d ). Similarly, if Q̃ is the measure with density ⌘ = (1 c⇠), we
can prove that Q̃ 2 E(M 1 , M 2 , . . . , M d ). Here P = 12 (Q + Q̃) and P 6= Q (since P(⇠ 6= 0) >
0). This contradicts the assumption that P is an extreme point of E(M 1 , M 2 , . . . , M d ).
Thus (iii) ) (ii).
To complete the proof, we need to show that (i) implies (v). Suppose (i) is true and let
Q 2 EP (M 1 , M 2 , . . . , M d ). Fix T < 1 and let ⌘ be any FT measurable bounded random
variable. Since L1 (⌦, FT , P) ✓ KT (M 1 , M 2 , . . . , M d ) and F0 is trivial, we can get for
1  j  d g j 2 L(M j ) with
Z T
T
⌘ =c+ hg, dM i
0
Rt Rt
such that 0 hg, dM i is a martingale. Let hs = gs 1[0,T ] (s) and Zt = 0 hh, dM i. It follows
F
that Zt = EP [(⌘ c) | Ft ] and since ⌘ is bounded, it follows that Z is bounded. As noted
earlier, since P and Q are equivalent, the stochastic integrals under P and Q are identical.
R
Under Q, M 1 , M 2 , . . . , M d being local martingales and Z = hh, dM i is a local martingale.
A
Since it is also bounded, we conclude invoking Corollary 9.18 that Z is also a martingale
under Q. Thus, EQ [ZT ] = 0 = EP [ZT ] and thus using ⌘ = c + ZT we get EQ [⌘] = c = EP [⌘].
Since this holds for all FT measurable bounded random variables ⌘, we conclude Q and P
R
agree on FT . In view of the assumption F = ([t Ft ), we get Q = P proving (v). This

completes the proof.
D
10.6 Integral Representation w.r.t. Sigma-Martingales

In this section, we will prove an analogue of Theorem 10.38 for a multidimensional sigma-
martingale.
Let us note that if X 1 , X 2 , . . . , X d are sigma-martingales, then we can choose pre-
R
dictable (0, 1)-valued process such that dX j is a local martingale for each j. First
for each j we choose j and then take = min( 1 , . . . , d ).
Here are two observations on sigma-martingales.
Lemma 10.39. Let X 1 , X 2 , . . . , X d be sigma-martingales, Then we can choose a predictable
(0, 1)-valued process such that
R
(i) N j = dX j is a martingale for each j.
(ii) KvT (X 1 , X 2 , . . . , X d ) = KvT (N 1 , N 2 , . . . , N d ).
(iii) EP (N 1 , N 2 , . . . , N d ) ✓ EP (X 1 , X 2 , . . . , X d ).
(iv) Suppose that P is an extreme point of E (X 1 , X 2 , . . . , X d ). Then P is also an extreme

point of E (N 1 , N 2 , . . . , N d ).
Proof. We have seen in Lemma 9.22 that we can choose (0, 1) valued predictable processes
j 2 L(X j ) such that M j =
R j
dX j are martingales. Let = min( 1 , . . . , d ). Let
j = j is bounded by 1. Then N j =
R R
j . Note that dX j = j dM j and then using
Theorem 9.12 it follows that N j is a martingale. This proves (i).

For (ii), note that g = (g 1 , g 2 , . . . , g d ) 2 Lv (N 1 , N 2 , . . . , N d ) if and only if g =
T
(g 1 , g 2 , . . . , g d ) 2 Lv (X 1 , X 2 , . . . , X d ) and then
Z Z
hg, dN i = h g, dXi.
(ii) follows from this.

F R
For (iii), if Q 2 EP (N 1 , N 2 , . . . , N d ), then X j = 1 N j is a Q- sigma-martingale for
1  j  d and thus Q 2 EP (X 1 , X 2 , . . . , X d ).
For (iv), if Q1 , Q2 2 E(N 1 , N 2 , . . . , N d ) with P = 12 (Q1 + Q2 ), then by part (iii)
A
Q1 , Q2 2 EP (N 1 , N 2 , . . . , N d ) ✓ EP (X 1 , X 2 , . . . , X d ) ✓ E (X 1 , X 2 , . . . , X d ).
Since P is an extreme point of E (X 1 , X 2 , . . . , X d ), we conclude Q1 = Q2 = P proving
R
(iv)
Part (ii) above along with Lemma 10.36 yields the following.
D
Corollary 10.40. Let X 1 , X 2 , . . . , X d be sigma-martingales. Then KvT (X 1 , X 2 , . . . , X d )

is a closed subspace of L1 (⌦, F, P)
Lemma 10.41. Let X 1 , X 2 , . . . , X d be sigma-martingales. Then E (X 1 , X 2 , . . . , X d ) is a

convex set.
Proof. Let Q1 , Q2 2 E (X 1 , X 2 , . . . , X d ), Q0 = ↵Q1 + (1 ↵)Q2 for 0 < ↵ < 1. For k =

R
k dX is a Qk -martingale
1, 2, let k , be (0, 1)-valued predictable processes such that j
R
for each j. Then taking = min( , ✓) and N j = dX j , it follows that for each j,
N j is a martingale under Q1 as well as under Q2 and thus under Q0 as well. Hence
Q0 2 E (X 1 , X 2 , . . . , X d ).
10.6. Integral Representation w.r.t. Sigma-Martingales 341
The proof of the next result is on the lines of corresponding results given in previous
sections. The proof closely follows the proof of Theorem 10.38.
Theorem 10.42. Let X 1 , X 2 , . . . , X d be sigma-martingales on (⌦, F, P). Suppose that F0

is trivial and F = ([t Ft ). Then the following are equivalent.
(i) For every bounded martingale S 9g 2 Lv (X 1 , X 2 , . . . , X d ) such that

Z t
St = S 0 + hg, dXi a.s. 8t. (10.6.1)
0
(ii) For every martingale S 9g 2 Lv (X 1 , X 2 , . . . , X d ) such that (10.6.1) is true.
(iii) P is an extreme point of the convex set E (X 1 , X 2 , . . . , X d ).
e (X 1 , X 2 , . . . , X d ) = {P}.
(iv) E
T
P
(v) EP (X 1 , X 2 , . . . , X d ) = {P}.
Proof. Once again it can be seen that (i) is same as L1 (⌦, FT , P) ✓ KvT (X 1 , . . . , X d )
F
80 < T < 1 and (ii) is same as L1 (⌦, FT , P) = KvT (X 1 , . . . , X d ) 80 < T < 1. As seen in
Theorem 10.18 KvT (X 1 , . . . , X d ) is a closed subspace of L1 (⌦, FT , P). Since L1 (⌦, FT , P)
A
is dense in L1 (⌦, FT , P), it follows that (i) and (ii) are equivalent. The proofs of (iv) )
(iii), (iv) implies (v) and (v) ) (iv) are exactly the same as that given in Theorem 10.38.
To see that (iii) ) (ii) let P be an extreme point of E(X 1 , X 2 , . . . , X d ). Let and N j
be as in Lemma 10.39. Part (iv) in Lemma 10.39 now implies that P be an extreme point of
R
E(N 1 , N 2 , . . . , N d ) and then Theorem 10.38 implies that L1 (⌦, FT , P) = KvT (N 1 , . . . , N d ).

Thus Part (ii) of Lemma 10.39 gives L1 (⌦, FT , P) = KvT (X 1 , . . . , X d ) 80 < T < 1 which
is same as (ii).
D
To complete the proof, we will show that (i) implies (v). This is exactly as in Theorem
10.38. Suppose (i) is true and let Q 2 EP (X 1 , X 2 , . . . , X d ). Fix T < 1 and let ⌘ be any
FT measurable bounded random variable. Since L1 (⌦, FT , P) ✓ KT (X 1 , X 2 , . . . , X d ) and
F0 is trivial, we can get for 1  j  d g j 2 L(X j ) with
Z T
⌘ =c+ hg, dXi
0
Rt Rt
such that 0 hg, dXi is a martingale. Let hs = gs 1[0,T ] (s) and Zt = 0 hh, dXi. It follows
that Zt = EP [(⌘ c) | Ft ] and since ⌘ is bounded, it follows that Z is bounded. As noted
earlier, since P and Q are equivalent, the stochastic integrals under P and Q are identical.
R
Under Q, X 1 , X 2 , . . . , X d are sigma-martingales and thus Z = hh, dM i is also a sigma-
martingale. Since it is also bounded, we conclude invoking Corollary 9.26 that Z is also
a martingale under Q. Thus, EQ [ZT ] = 0 = EP [ZT ] and thus using ⌘ = c + ZT we get
EQ [⌘] = c = EP [⌘]. Since this holds for all FT measurable bounded random variables ⌘,
we conclude Q and P agree on FT . In view of the assumption F = ([t Ft ), we get Q = P
proving (v). This completes the proof.
This result has strong connections to mathematical finance and in particular to the
theory of asset pricing. We will give a brief background in the next section.
10.7 Connections to Mathematical Finance

Connections of stochastic processes and mathematical finance go back to 1900 when Bache-
T
lier [1] studied the question of option pricing in his Ph. D. thesis. Here he had modelled
the stock price movement as a Brownian Motion. This was before Einstein used Brownian
Motion in the context of physics and movement of particles. Samuelson, Merton worked
F
extensively on this question [53], [47]. The paper by Black - Scholes brought the connec-
tion to the forefront. The papers by Harrison and Pliska around 1980 built the formal
connection between mathematical finance and stochastic calculus [21, 22]. The fundamen-
A
tal papers by Kreps [43], Yan [58], Stricker [55] laid the foundation for the so-called First
Fundamental Theorem of Asset Pricing. The final version of this result is due to Delbaen
and Schachermayer [11], [12]. Also see [52], [42], [29], [31], [2].
R
We will give a brief account of the framework. We consider a market with d stocks,
modelled as stochastic processes X 1 , X 2 , . . . , X d , assumed to be processes with r.c.l.l. paths.
The market is assumed to be ideal where there are no transaction costs and rate of interest
D
r on deposits is same as rate of interest on loans, with instantaneous compounding, so that

deposit of 1$ is worth ert at time t. Let Stj = Xtj e rt , 1  j  d denote the discounted
stock prices. Let Ft = (Suj : 0  u  t, 1  j  d).
A simple trading strategy is where an investor trades stock at finitely many time points
and at a time s she/he can use information available up to time s. Then it can be seen that
the strategy can be represented as follows: the times where the stock holdings change should
be a stop time and thus the strategy f = (f 1 , f 2 , . . . , f d ) can be seen to be representable
as
mX1 j
j
f = ak 1( k , k+1 ] (10.7.1)
k=0
10.7. Connections to Mathematical Finance 343
where k are stop times and ajk are F k measurable bounded random variables. For such
a trading strategy, the value function (representing gain or loss from the strategy) is given
by
d m
X X1 j j
Vf (f ) = ak (S k+1 ^t S j k ^t ). (10.7.2)
j=1 k=0
Rt
When S 1 , . . . S j are semimartingales, then we see that Vt (f ) = 0 hf, dSi.
An simple trading strategy f is said to be an arbitrage opportunity if for some T (i)
P(VT (f ) 0) = 1 and (ii) P(VT (f ) > 0) > 0. One of the economic principles is that such
a strategy cannot exist in a market in equilibrium, for if it existed, all investors will follow
the strategy as it gives an investor a shot at making money without taking any risk, thus
disturbing the equilibrium. This is referred to as the No Arbitrage principle or simply NA.
If each S j is a martingale, then Vt (f ) is a martingale for every simple strategy f and
T
thus E[VT (f )] = 0 and thus NA holds. It can be seen that NA is true even when each
S j is martingale under a probability measure Q that is equivalent to P. The converse to
this statement is not true. However, it was recognized that if one rules out approximate
F
arbitrage (in an appropriate sense) then indeed the converse is true. We will not trace
the history of this line of thought (see references given above for the same) but give three
results on this theme. The following result is Theorem 7.2 in [11].
A
Theorem 10.43. Suppose the processes S 1 , S 2 . . . S d are locally bounded and that for any
sequence of simple strategies f n 2 Sd such that 0 < T < 1, the condition
1
R
P(VT (f n ) ) = 1, 8n 1 (10.7.3)
n
implies that for all ✏ > 0
P(|VT (f n )| ✏) ! 0 as n ! 1. (10.7.4)
D
Then S j is a semimartingale for each j.
The condition (10.7.3) ) (10.7.4) is essentially ruling out approximate arbitrage and
has been called NFLVR - No Free Lunch with Vanishing Risk by Delbaen - Schachermayer.
Thus we now assume that S 1 , S 2 . . . S d are semimartingales. Lv (X 1 , . . . , X d ) is taken
as the class of trading strategies and for f 2 Lv (X 1 , . . . , X d ), the value process for the
Rt
trading strategy f is defined to be Vt (f ) = 0 hf, dXi. A trading strategy f is said to be
admissible if for some constant K, one has
Z t
P( hf, dXi K 8t) = 1 (10.7.5)
0
and Z t
hf, dXi converges in probability (to say V (f )) as t ! 1. (10.7.6)
0
The following theorem for one dimensional case was proven in [11] (Corollary 1.2). For the
multidimensional case see Theorem 8.2.1 in [13]. This also follows from the Theorem 10.45
Theorem 10.44. Suppose the processes S 1 , S 2 . . . S d are locally bounded semimartingales

and that for any sequence of admissible strategies f n the condition
1
P(V (f n ) ) = 1, 8n 1 (10.7.7)
n
P(|V (f n )| ✏) ! 0 as n ! 1. (10.7.8)
Then there exists a probability measure Q equivalent to P such that each S j is a local
T
martingale on (⌦, F, Q).
Here is the final version of the (first) Fundamental Theorem of Asset Pricing - Theorem
14.1.1 in [12]. Also see [29], who independently proved the result.
sequence of admissible strategies f n the condition

1
F
Theorem 10.45. Suppose the processes S 1 , S 2 . . . S d are semimartingales and that for any
A
P(V (f n ) ) = 1, 8n 1 (10.7.9)
n
P(|V (f n )| ✏) ! 0 as n ! 1. (10.7.10)
R
Then there exists a probability measure Q equivalent to P such that each S j is a sigma-
martingale on (⌦, F, Q).
D
We can recast this result as: for semimartingales S 1 , S 2 . . . S d : EP (S 1 , S 2 . . . S d ) is

non-empty if and only if S 1 , S 2 . . . S d satisfy NFLVR (namely (10.7.9) ) (10.7.10) ).
We now come to derivative securities and the role of NA condition (and NFLVR). A
derivative security, also called a contingent claim, is a type of security traded whose value
is contingent upon (or depends upon) the prices of the stocks. Thus the payout ⇠, say at
time T , could be ⇠ = g(XT1 , XT2 , . . . , XTd ) for a function g : Rd 7! R or could be a function
of the paths {Xtj : 0  t  T, 1  j  d}. All we require is that ⇠ is FT measurable so
that at time T , ⇠ is observed or known.
For example, ⇠ = (XT1 K)+ : this is called the European Call Option (on X 1 with
strike price K and terminal time T ). Call Options have been traded on various exchanges
10.7. Connections to Mathematical Finance 345
across the world for close to a century. It was in the context of pricing of options that
Bachelier had introduced in 1900 Brownian motion as a model for stock prices.
Suppose that ⇠ (FT measurable random variable) is a contingent claim, x 2 R and
f 2 Lv (S 1 , S 2 . . . S d ) is a trading strategy with
Z T
x+ < f, dS >= ⇠ a.s. (10.7.11)
0
Even if ⇠ is not o↵ered for trade, an investor can always replicate it with an initial invest-
ment x following the strategy f . If (10.7.11) holds, (x, f ) is called replicating strategy. In
such a case, the price p of the contingent claim (assuming that the market is in equilibrium)
must be equal to x. For if p > x, an investor could sell one the contingent claim at p, keep
aside p x, invest x and follow the strategy f . At time T the portfolio is worth exactly
what the investor has to pay for the contingent claim. Thus the investor has made a profit
T
of (p x) without any risk, in other words, it is an arbitrage opportunity. The possibility
p < x can be ruled out likewise, this time the investor buys a contingent claim at p and
follows strategy ( s, f ).
F
Thus if (10.7.11) holds, in other words, a replicating strategy exists for a contingent
claim ⇠, the price of the contingent claim equals the initial investment needed for the
strategy.
A
The market consisting of (discounted) stocks S 1 , S 2 , . . . , S d is said to be complete if for
all bounded FT measurable random variables ⇠, there exists x 2 R and f 2 Lv (S 1 , S 2 , . . . , S d )
such that for some K < 1,
Z t
R
| < f, dS > |  K 8t 0 a.s. (10.7.12)

0
and Z T
D
⇠ =x+ < f, dS > a.s. (10.7.13)

0
Here is the second fundamental theorem of asset pricing.
Theorem 10.46. Suppose S 1 , S 2 , . . . , S d admit a Equivalent sigma-martingale measure

(ESMM). Then the market is complete if and only if the ESMM is unique.
Proof. Let Q 2 EP (S 1 , S 2 , . . . , S d ). Suppose the market is complete. Fix T > 0 and let
⇠ 2 L1 (⌦, FT , Q). Consider the contingent claim ⇠. Using completeness of market, obtain
x, f satisfying (10.7.12) and (10.7.13). Under Q, S 1 , S 2 , . . . , S d being sigma-martingales
Rt
Nt = 0 < f, dS > for t  T and Nt = Nt^T is also a sigma-martingale. Being bounded (in
view of (10.7.12) ) it follows that N is a martingale. Thus ⇠ 2 KvT (S 1 , S 2 , . . . , S d ). Thus

completeness of market is same is
KvT (S 1 , S 2 , . . . , S d ) = L1 (⌦, FT , Q).
By Theorem 10.42, this is equivalent to EQ (S 1 , S 2 , . . . , S d ) = Q.
T
F
A
R
D
Chapter 11
Dominating Process of a Semimartingale
In chapter 7, we saw that using random time change, any continuous semimartingale can
T
be transformed into a amenable semimartingale, and then one can have a growth estimate
on the stochastic integral similar to the one satisfied by integrals w.r.t. Brownian motion.
When it comes to r.c.l.l. semimartingales, this is impossible in view of the jumps. Here
we are faced with a difficulty as the stochastic integral is essentially created via an L2
F
estimate while the integral w.r.t. a process with finite variation is essentially defined as an
L1 object - as in Lebesgue-Stieltjes integral. The problem is compounded by the fact that
A
not every semimartingale need be locally integrable.
Metivier-Pellaumail obtained an inequality that makes all semimartingales amenable to
the L2 treatment. Indeed, P. A. Meyer in a private correspondence had drawn our attention
to the Metivier-Pellaumail inequality when he had seen the random change technique in
R
[33] - both have an e↵ect of making every semimartingale amenable to the L2 theory. As
in earlier chapters, we fix a filtration (F⇧ ) on a complete probability space (⌦, F, P) and
we assume that F0 contains all P-null sets in F.
D
The Metivier-Pellaumail inequality relies on predictable quadratic variation hM, M i of

a square integrable martingale, which we discussed in the previous chapter. The inequality
states that for a square integrable martingale M and a stop times ⌧ , one has
E[ sup |Mt |2 ]  4E[ [M, M ]⌧ + hM, M i⌧ ]. (11.0.1)
0t<⌧
Since given any adapted process A with r.c.l.l. paths, we can get stop times ⌧n such that
E[ sup |At |2 ] < 1
0t<⌧n
the estimate (11.0.1) makes it feasible to obtain an estimate on growth of stochastic integral
R
f dX for any semimartingale X as we will see in later in this chapter.
347
348 Chapter 11. Dominating Process of a Semimartingale
11.1 An optimization result

Let H be a sub -field of F and ⇠ be a square integrable r.v. such that
E[⇠ | H] = 0.
Let A 2 F. Consider the class L of random variables such that E[ | H] = 0 and
1A = ⇠ 1A . Consider the problem of minimizing E[ ], 2 L.
2
Let us examine this in a special case, where H is the -field generated by a countable
partition {Hn : n 1} of ⌦. Let En = Hn \ A and Fn = Hn \ Ac . Let pn = P(En ) and
qn = P(Fn )
an = E[⇠ 1En ], bn = E[⇠ 1Fn ].
Since E[⇠ | H] = 0, it follows that an + bn = 0. It follows that for any 2 L, E[ 1Fn ] = bn
since E[ | H] = 0 and 1A = ⇠ 1A . Since there is no other restriction on , it is clear that
T
in this case, the minimum is attained when is a constant on each Fn , equal to 0 if pn = 0
or qn = 0 and equal to qbnn when qn > 0. Thus let N 0 = {n : pn > 0, qn > 0} and
X bn
= ⇠ 1A + 1 Fn
and it follows that for 2L

E[ 2
q
0 n
]
F
n2N
E[ 2
].
A
We would like to get a description of as well as E[ 2 ] in terms of ⇠, H and A. For this,
let G = (H, A) and ⌘ = E[⇠ | G]. Then
X an X bn
⌘= 1 En + 1 Fn
R
0
pn q
0 n
n2N n2N
and
= ⇠ 1A + ⌘ 1Ac .
D
Thus
X b2
2 n
E[ ] = E[⇠ 2 1A ] + .
q
0 n
n2N
Now it can be checked that (using a2n = b2n )
X 1 a2 b2
E[⌘ 2 | H] = ( n + n ) 1Hn
pn + q n pn qn
n2N0
1 pn + q n
= b2n ( ) 1Hn
pn + q n pn q n
b2
= n 1Hn
pn q n
11.1. An optimization result 349
It thus follows that

X b2n
E[1A E[⌘ 2 | H]] = E[ 1E ]
pn q n n
n2N0
X b2
n
=
q
0 n
n2N
and hence
2
E[ ] = E[⇠ 2 1A ] + E[1A E[⌘ 2 | H]].
We will now show that the result is true in general. The calculations done above give
us a clue as to the answer.
Theorem 11.1. Let H be a sub- -field of F and let ⇠ be a random variable with E[⇠ 2 ] < 1
such that E[⇠ | H] = 0. Let A 2 F and
T
L = { : E[ | H] = 0, 1A = ⇠ 1A }.
Then for 2L
where G = (H, A), ⌘ = E[⇠ | G] and

E[ 2
]
FE[ 2
]
A
= ⇠ 1A + ⌘ 1A c .
Further,
2
E[ ] = E[⇠ 2 1A ] + E[1A E[⌘ 2 | H]]. (11.1.1)
R
Proof. Let us begin by noting that G = {(B \ A) [ (C \ Ac ) : B, C 2 H}. Hence
L2 (⌦, G, P) = {⇣ 1A + ✓1Ac : ⇣, ✓ 2 L2 (⌦, H, P)}. (11.1.2)

D
Thus, ⌘ = E[⇠ | G] can be written as ⌘ = ⇣ 1A + ✓1Ac where ⇣, ✓ are H measurable square

integrable random variables. Note that
2
E[ ] = E[( )2 + 2
+ 2( ) ]
Now ( )1A = 0 and hence ( ) =( ) 1Ac =( ) 1Ac ✓ = ( )✓ and

hence
E[2( ) ] =E[E[2( )✓ | H]]
=E[✓E[2( ) | H]]
=0
as E[ | H] = 0 and E[ | H] = 0. This proves the first part. For the second part, let
↵ = E[1A | H]. Since E[⌘ | H] = 0, we have
⇣↵ + ✓(1 ↵) = 0. (11.1.3)
Thus
E[⌘ 2 | H] =E[⇣ 2 1A + ✓2 1Ac | H]
=⇣ 2 ↵ + ✓2 (1 ↵)
and hence
E[1A E[⌘ 2 | H]] = E[E[⌘ 2 | H]E[1A | H]]
= E[⇣ 2 ↵ + ✓2 (1 ↵)E[1A | H]]
2 2 2 (11.1.4)
= E[⇣ ↵ + ✓ (1 ↵)↵]
= E[✓2 (1 ↵)2 + ✓2 (1 ↵)↵]
T
= E[✓2 (1 ↵)]
where we have used (11.1.3). On the other hand
E[⌘ 2 1Ac ] =E[✓2 1Ac ]
Thus (11.1.4) and (11.1.5) yield

F
=E[✓2 E[1Ac | H]
=E[✓2 (1 ↵)]
(11.1.5)
A
E[⌘ 2 1Ac ] = E[1A E[⌘ 2 | H]]. (11.1.6)
Now, from the definition of , we have
2
E[ ] =E[⇠ 2 1A ] + E[⌘ 2 1Ac ]
R
(11.1.7)
=E[⇠ 2 1A ] + E[1A E[⌘ 2 | H]].
where the last step follows from (11.1.6).
D
Let us observe that ⌘ = E[⇠ | G] and hence by Jensen’s inequality, one has.
E[1A E[⌘ 2 | H]]  E[1A E[⇠ 2 | H]].
Thus the previous result leads to
Theorem 11.2. Let ⇠ be a random variable such that E[⇠ | H] = 0 and E[⇠ 2 ] < 1. For
A 2 F, there exists a random variable such that
(i) 1A = ⇠ 1A .
(ii) E[ | H] = 0.
(iii) E[ 2]  E[1A (⇠ 2 + E[⇠ 2 | H])].

11.2. Metivier-Pellaumail inequality 351
11.2 Metivier-Pellaumail inequality

We are now in a position to prove
Theorem 11.3. (Metivier-Pellaumail inequality) Let M be a square integrable martingale
with M0 = 0 and be a stop time. Then we have
E[sup|Mt |2 ]  4[E[M, M ] + E[hM, M i ]]. (11.2.1)
t<
Proof. Suffices to prove it for bounded as the general case follows by using (11.2.1) for
^ m and taking limit over m. So we assume  T . Now we can assume that Mt = Mt^T .
Let {⌧k : k 1} be predictable stop times as in Theorem 8.68. Let ⇠k = ( M )⌧k ,
P
U = ⇠k 1[⌧k ,1) , Z = k2F U k , N = M Z. Since ⌧k is predictable, U k is a martingale.
k
We have seen in Theorem 8.68 that hN, N i is a continuous increasing process. Moreover
X
⇠k2 1[⌧k ,1) (t)
T
[Z, Z]t = (11.2.2)
k2F
and
X
hZ, Zit = E[⇠k2 | F⌧k ]1[⌧k ,1) (t) (11.2.3)
k
k2F
For k 2 F , let Gk = (F⌧k , { > ⌧k }), ⌘k = E[⇠k | Gk ] and
= ⇠k 1{ >⌧k }
F + ⌘k 1 { ⌧k } .
A
Since E[⇠k | F⌧k ] = 0 and F⌧k ✓ Gk , it follows that E[ k | F⌧k ] = 0 and hence
Vtk = k 1[⌧k ,1) (t)
is a martingale. Since V k , V j do not have common jumps for j 6= k

R
[V k , V j ] = 0, hV k , V j i = 0. (11.2.4)
Moreover, for all k 2 F , Theorem 11.2 implies
D
2 2
E[( k) ]  E[1{ >⌧k } (⇠k + E[⇠k2 | F⌧k ])] (11.2.5)
This of course also gives
2
E[( k) ]  2E[(⇠k )2 ].
P
Let Y = k2F V k . If F is finite, clearly, Y is a martingale. In case F is infinite, the
series converges and Y is a martingale as in the proof of Theorem 8.68. Noting that
k 1{ >⌧k } = ⇠k 1{ >⌧k } , we have
Vtk 1{t< } = k 1{t< } 1[⌧k ,1) (t)
= ⇠k 1{t< } 1[⌧k ,1) (t) (11.2.6)

= Utk 1{t< }
As a consequence of (11.2.6), we get
Zt 1{t< } = Yt 1{t< } . (11.2.7)
Moreover, using (11.2.5), (11.2.2) and (11.2.3) we get

X
2
E[[Y, Y ] ] = E[ k 1 { ⌧k } ]
k2F
X
2
 E[ k]
k2F
(11.2.8)
2
 E[1{ >⌧k } (⇠k + E[⇠k2 | F⌧k ])]
 E[[Z, Z] + hZ, Zi ]
Let X = N + Y . Then in view of (11.2.7), Xt 1{t< } = Mt 1{t< } and hence
E[sup|Mt |2 ] = E[sup|Xt |2 ]
T
t< t<
 E[sup|Xt |2 ] (11.2.9)
t
 4E[[X, X] ]
F
Finally, using (11.2.8) along with [N, Y ] = 0, we get
E[[X, X] ] = E[[N, N ] ] + E[[Y, Y ] ]
A
(11.2.10)
 E[hN, N i ] + E[[Z, Z] ] + E[hZ, Zi ]
Since hN, N i is continuous, we have hN, N i = hN, N i . As seen in Theorem 8.68
hN, Zi = 0 and hence we get
R
hN, N i + hZ, Zi = hM, M i .
This along with (11.2.9) and (11.2.10) implies

D
E[sup|Mt |2 ]  4[E[[Z, Z] ] + E[hM, M i ]] (11.2.11)

t<
Finally, [Z, Z]  [M, M ] implies (11.2.1).
11.3 Growth Estimate

R
The Metivier Pellaumail inequality enables us to obtain a growth estimate on f dX for
any semimartingale X. Given a locally bounded predictable process f and a decomposition
X = M + A of a semimartingale X, where M is a locally square integrable martingale with
R R
M0 = 0 and A is a process with bounded variation paths. Let Y = f dX, N = f dM
11.3. Growth Estimate 353
R
and B = f dA. Then Y = N + B, N is a locally square integrable martingale and B 2 V.
Further,
Z t
[N, N ]t = fs2 d[M, M ]s , (11.3.1)
0
Z t
hN, N it = fs2 dhM, M is (11.3.2)
0
and this in view of (11.2.1), we have

Z t Z ⌧ Z ⌧
2 2
E[sup| f dM | ]  4E[ fs d[M, M ]s + fs2 dhM, M is ]. (11.3.3)
t<⌧ 0 0 0
Writing |A|t = Var[0,t] (A), we have for all t,

Z t Z t
| |fs |dAs |2  |A|t |fs2 |d|A|s
T
0 0
and hence Z Z
t ⌧
E[sup| f dA|2 ]  E[ |A|⌧ |fs2 |d|A|s ] (11.3.4)
t<⌧ 0 0
F
We can combine the two estimates (11.3.3) and (11.3.4) as follows: let
Vt = 8(1 + [M, M ]t + hM, M it + Var[0,t] (A)) (11.3.5)

A
and then we have (compare with (7.2.3) for amenable semimartingales)
Z t Z ⌧
E[sup| f dX|2 ]  E[V⌧ |fs2 |d|V |s ]. (11.3.6)
t<⌧ 0 0
R
The significant point about the estimate (11.3.3) is that given any locally bounded pre-
dictable f and any semimartingale X, we can get a sequence of stop times ⌧n increasing
to 1 such that the expression on right hand in (11.3.6) is finite. This may not be the case
D
for the estimate Z Z t ⌧

E[sup| f dX|2 ]  E[V⌧ |fs2 |d|V |s ]
t<⌧ 0 0
which indeed can be obtained without any need for the Metivier-Pellaumail inequality.
The process V introduced above (modulo a constant) was called a control process of the
semimartingale X.
While the control process was used to successfully deal with stochastic di↵erential
equations driven by semimartingales, the notion is not natural as even if the semimartingale
is small in Emery topology, the control process may not be small. Further, if V is control
process for a semimartingale X, for a constant c, cV may not be a control process for cX.
Definition 11.4. An (adapted) increasing process U is said to be a dominating process for

a semimartingale X if there exists a decomposition X = M + A, with M a locally square
integrable martingale with M0 = 0, A a process with bounded variation paths such that the
process B defined by
p p
Bt = Ut 2 2([M, M ]t + hM, M it )1/2 2|A|t (11.3.7)
belongs to V+ , i.e. B is an increasing process with B0 0.
Theorem 11.5. Every semimartingale X admits a dominating process.
Proof. As noted in Corollary 5.53, X admits a decomposition X = M + A, where M is a

locally square integrable martingale with M0 = 0 and A 2 V. Then
p p
Ut = 2 2([M, M ]t + hM, M it )1/2 + 2|A|t (11.3.8)
T
is a dominating process.
Remark 11.6. One of the reason that we did not define U given by (11.3.8) for some
decomposition X = M + A as the dominating process is that now we can have a common
F
dominating process for finitely many semimartingales.
With this definition we have the following inequality.

A
Theorem 11.7. Let X be a semimartingale and U be a dominating process for X. Then
for any stop time we have
E[ sup |Xt |2 ]  E[U 2 ] (11.3.9)
R
0t<
Proof. Let X = M + A be a decomposition of semimartingale X as in the Definition 11.4,

with B defined by 11.3.7 being an increasing process with B0 0. Then it follows that
Bt 0 for all t and hence
D
p p
2 2([M, M ]t + hM, M it )1/2 + 2|A|t  Ut
and as a result
8([M, M ]t + hM, M it ) + 2|A|2t  Ut2 (11.3.10)
On the other hand, for any stop time , we have
E[ sup |Xt |2 ]  2E[ sup |Mt |2 ] + 2E[ sup |At |2 ] (11.3.11)
0t< 0t< 0t<
By Metivier-Pellaumail inequality (11.2.1) we have

E[sup|Mt |2 ]  4[E[M, M ] + E[hM, M i ]]. (11.3.12)
t<
At the same time |At |  |A|t (where |A| is the total variation of A). As a result
E[sup|At |2 ]  E[ |A|2 ]. (11.3.13)
t<
Combining (11.3.11)-(11.3.13), we get
E[ sup |Xt |2 ]  E[8([M, M ] + hM, M i ) + 2|A|2 ]. (11.3.14)
0t<
Now the required estimate (11.3.9) follows from (11.3.10) and (11.3.14).
Ideally, we would have liked to have a notion of dominating process such that if U 1 , U 2
be dominating processes of semimartingale X 1 , X 2 respectively, then V = U 1 + U 2 is a
dominating process for Y = X 1 + X 2 . While this is not quite true, we will show that Y
admits a dominating process W such that Wt  Vt . To prove this, we need the following
result.
T
Lemma 11.8. For M, N be locally square integrable martingales, let q(M, N ) = [M, N ] +
hM, N i. Then, for all t
1 1 1
(q(M + N, M + N )t ) 2  (q(M, M )t ) 2 + (q(N, N )t ) 2 . (11.3.15)
(q(
k
X
i
M ,
k
X
i
M )t ) 
F
Also, if M i are locally square integrable martingales, i = 1, 2, . . . , k then
1
2
k
X 1
(q(M i , M i )t ) 2 . (11.3.16)
A
i=1 i=1 i=1
Proof. Since M, N 7! [M, N ] and M, N 7! hM, N i are bilinear maps, it follows that same
is true of M, N 7! q(M, N ). Further, q(M, M )t 0. Then proceeding as in the proof of
R
Theorems 4.69 and 8.56, we can conclude that

1 1
q(M, N )t  (q(M, M )t ) 2 (q(N, N )t ) 2 (11.3.17)
and as a result one has
D
q(M + N, M + N )t = q(M, M )t + q(N, N )t + 2q(M, N )t

1 1
 q(M, M )t + q(N, N )t + 2(q(M, M )t ) 2 (q(N, N )t ) 2 .
1 1
= ((q(M, M )t ) 2 + (q(N, N )t ) 2 )2
This proves (11.3.15). The estimate (11.3.16) is just the k variable version of the same.
Theorem 11.9. Let X 1 , X 2 be semimartingales and let U 1 , U 2 be dominating processes

for X 1 and X 2 respectively. Let Y = X 1 + X 2 . Then The semimartingale Y admits a
dominating process V such that
Vt  Ut1 + Ut2 8t (11.3.18)
Proof. Let X i = M i + Ai (i = 1, 2) be decompositions of the semimartingales with M i

being a local square integrable martingale with M0i = 0 and Ai being a process with finite
variation paths such that
Dti = Uti Cti
are increasing processes with D0i 0 where

p p
Cti = 2 2([M i , M i ]t + hM i , M i it )1/2 2|Ai |t .
Let N = M 1 + M 2 , B = A1 + A2 and
p p
Vt = 2 2([N, N ]t + hN, N it )1/2 + 2|B|t .
Then V is a dominating process for Y and to complete the proof of the first part, we need
to show (11.3.18). Clearly,
T
|B|t  |Ai |t + |Ai |t 8t. (11.3.19)
Since N = M 1 + M 2 , it follows from Lemma 11.8 that

([N, N ]t + hN, N it )1/2
F
 ([M 1 , M 1 ]t + hM 1 , M 1 it )1/2 + ([M 2 , M 2 ]t + hM 2 , M 2 it )1/2
Now estimates (11.3.19) and (11.3.20) imply
(11.3.20)
A
Vt  Ct1 + Ct2 .
Since Cti  Uti , the required result follows.

R
We now move to exploring the connection of dominating process with stochastic inte-
gral. Here are a sequence of auxiliary results that we need later.
D
Lemma 11.10. Let U, V 2 V+ be such that W defined by Wt = Vt Ut belongs to V + .

Then Z defined by Zt = Vt2 Ut2 also belongs to V+ .
Proof. Note that U, V 2 V+ implies Ut 0 and Vt 0 and

Zt Zs = (Vt Ut )(Vt + Ut ) (Vs Us )(Vs + Us )
= Wt (Vt + Ut ) Ws (Vs + Us )
= (Wt Ws )(Vs + Us ) + Wt (Vt Vs ) + Wt (Ut Us )
Since W, U, V 2 V+, it follows that Zt Zs 0 and thus Z is increasing. Also, easy to see
Z0 0 and so Z 2 V+ .
Remark 11.11. Essentially the same argument as in the Lemma 11.8 (see also (4.6.21)) gives
us for locally square integrable martingales N j , j = 1, 2, . . . k
1 1
hN i , N j it  (hN i , N i it ) 2 (hN j , N j it ) 2 (11.3.21)
1 1
[N i , N j ]t  ([N i , N i ]t ) 2 ([N j , N j ]t ) 2 (11.3.22)
k
X k
X k X
X k
1 1
(h N i, N j it ) 2 = ( hN i , N j it ) 2
i=1 j=1 i=1 j=1
k X
X k
1 1
( (hN i , N i it ) 2 (hN j , N j it ) 2 (11.3.23)
i=1 j=1
k
X 1
= (hN i , N i it ) 2
T
i=1
and similarly,
k
X k
X k
X
1 1
i j
([ N , N ]t )  ( 2 ([N i , N i ]t ) 2 (11.3.24)
i=1 j=1
F
For a locally bounded predictable process f and an increasing process V , let ✓t (f, V )
be defined by
i=1
A
Z t Z t
2 2 12
✓t (f, V ) = ( |fs | dVs ) + |fs |dVs . (11.3.25)
0 0
Note that
R
✓t (f, V )  2( sup |fs |)Vt (11.3.26)

0st
Z t Z t Z t
|fs |2 dVs2  ✓t2 (f, V )  2 |fs |2 dVs2 + 2( |fs |dVs )2 (11.3.27)
0 0 0
D
and also
Z t Z t Z t
2
|fs | dVs2  ✓t2 (f, V )  2( |fs | 2
dVs2 + Vt |fs |2 dVs ) (11.3.28)
0 0 0
The following result gives interplay of this notion of dominating process with that of
stochastic integral.
Theorem 11.12. Let X be a semimartingales, f be a locally bounded predictable process

R
and let U be a dominating processes for X. Let Y = f dX. Then the semimartingale Y
admits a dominating process V such that
Vt  ✓t (f, U ) 8t (11.3.29)
Proof. Let X = M + A be a decomposition of the semimartingale X with M being a local

square integrable martingale with M0 = 0 and A being a process with finite variation paths
p
such that U C 2|A| 2 V+ where C 2 V+ is given by
p
Ct = 2 2(hM, M it + [M, M ]t )1/2 .
R R
Let N = f dM , B = f dA. Then Y = N +B, N is a locally square integrable martingale
with N0 = 0, B is a process with finite variation paths such that Y = N + B. Now
Z t Z t
2
hN, N it + [N, N ]t = |f | dhM, M i + |f |2 d[M, M ]
0 0
Rt
and |B|t = 0 |f |d|A| and as a consequence, V defined below is a dominating process:
p p
Vt = 2 2(hN, N it + [N, N ]t )1/2 + 2|B|
Z t p Z t (11.3.30)
T
2 2 1/2
= ( |f | dC ) + 2 |f |d|A|
0 0
Since U C 2 V+ , it follows that (using Lemma 11.10) U 2 C 2 2 V+ and hence

Z t Z t
and U
p
2|A| 2 V+ implies
|f |2 dC 2 
p Z t
0
Z t
F
|f |2 dU 2
0
(11.3.31)
A
2 |f |d|A|  |f |d|U | (11.3.32)
0 0
Combining (11.3.30)-(11.3.32), we get
Z t Z t
R
2 2 1/2
Vt  ( |f | dU ) + |f |d|U | = ✓t (f, U ). (11.3.33)
0 0
This proves (11.3.29).
D
Putting together Theorems 11.7 and 11.12 we now obtain an estimate on the growth
of a stochastic integral.
Theorem 11.13. Let X be semimartingale and f be a locally bounded predictable process.

Let V be a dominating process for X. Then for any stop time ⌧ one has
Z t
E[sup| f dX|2 ]  E[✓⌧2 (f, V )] (11.3.34)
t<⌧ 0
Further, Z t
E[sup| f dX|2 ]  4E[( sup |fs2 |)V⌧2 ] (11.3.35)
t<⌧ 0 0s<⌧
11.4. Alternate metric for Emery topology 359
Proof. As noted earlier, (11.3.34) follows from Theorems 11.7 and 11.12 and then (11.3.35)
follows from (11.3.26).
Remark 11.14. Before proceeding, we would like to stress that given a locally bounded
predictable f and an increasing process V 2 V+ , one can always get stop times ⌧m increasing
to 1 such that
E[✓⌧2m (f, V )] < 1
and thus the estimate (11.3.34) is meaningful for any locally bounded predictable f and any
semimartingale.
We can now add to the Bichteler-Dellacherie-Meyer-Mokobodzky Theorem. Each of
the six equivalent conditions in Theorem 5.78 is equivalent to existence of a dominating
process. We will list here only two out of the six.
T
Theorem 11.15. Let X be an r.c.l.l. (F· ) adapted process. Let JX be defined by (4.2.1)-
(4.2.2). Then the following are equivalent.
(i) X is a weak stochastic integrator, i.e. if f n 2 S, f n ! 0 uniformly, then JX (f n )t ! 0
in probability 8t < 1. F
(ii) X is a semimartingale, i.e. X admits a decomposition X = M + A where M is a local
A
martingale and A is a process with finite variation paths.
(iii) There exists an increasing adapted process V such that for all stop times ⌧ and for
all f 2 S, one has
Z Z
R
E[sup|JX (f )t | ]  2E[ 1[0,⌧ ) (s)|fs | dVs + ( 1[0,⌧ ) (s)|fs |dVs )2 ]

2 2 2
(11.3.36)
t<⌧
Proof. We have already shown that (i) and (ii) are equivalent. Using Theorem 11.13, it
D
follows that (ii) implies (iii) follows. To see that (iii) implies (i), note that given any
adapted increasing process V , s < 1 and ✏ > 0, we can get a stop time ⌧ such that V⌧ is
bounded and P(s < ⌧ ) (1 ✏). See Remark 11.14. Now the result follows from Theorem
11.13 and the estimate (11.3.27).
11.4 Alternate metric for Emery topology

We will now introduce another metric on the space of semimartingales in terms of domi-
nating process and then show that this metric is equivalent to the metric introduced earlier
for the Emery topology.
Definition 11.16. For semimartingales X, Y , let
dsm (X, Y ) = inf{ducp (V, 0) : V is a dominating process for X Y }.
It is easy to see that if V is a dominating process for X Y then V is also a dominating

process for Y X and thus dsm (X, Y ) = dsm (Y, X). The next two results will show that
dsm is a metric.
Lemma 11.17. Let X, Y be semimartingales such that dsm (X, Y ) = 0. then X = Y .
Proof. Get V k 2 V+ such that V k dominates X Y and ducp (V k , 0)  2 k. Then

1 X
X 1
n
2 E[ |Vnk | ^ 1]  1
k=1 n=1
and as a consequence, for every n, (using Fubini’s Theorem) we have
T
1
X
n
E[ 2 [ |Vnk | ^ 1]]  1.
k=1
Vtk
Thus (noting 0)
1
X
k=1
2 n F
[Vnk ^ 1] < 1 a.s.
A
and hence for every t < 1
1
X
Ut = [ Vtk ] < 1 a.s.
k=1
R
Now let ⌧m be stop times increasing to 1 such that U⌧m  m. In view of (11.3.9), we
have for every k
E[ sup |Xt Yt |2 ]  E[(V⌧km )2 ]. (11.4.1)
0t<⌧m
D
Now (V⌧km )2 converges to zero in probability and is dominated by m2 and thus the right
hand since in (11.4.1) converges to zero. Thus for every m
E[ sup |Xt Yt | 2 ] = 0
0t<⌧m
showing that X = Y .
Remains to show that dsm satisfies triangle inequality, which we do next.
Lemma 11.18. Let X, Y, Z be semimartingales. Then
dsm (X, Z)  dsm (X, Y ) + dsm (Y, Z). (11.4.2)

Proof. Given " > 0, get U, V 2 V+ such that U is a dominating process for X Y , V is a
dominating process for Y Z and
ducp (U, 0)  dsm (X, Y ) + "
ducp (V, 0)  dsm (Y, Z) + ".
Since X Z = (X Y ) + (Y Z), invoking Theorem 11.9, we can get W 2 V+ such that

W is a dominating process for X Z and W  U + V . As a result, we note that
ducp (W, 0)  ducp (U, 0) + ducp (V, 0).
Putting these estimates together, we get

dsm (X, Z)  ducp (W, 0)
 ducp (U, 0) + ducp (V, 0)
T
 dsm (X, Y ) + dsm (Y, Z) + 2".
Since " is arbitrary, this proves 11.4.2.
F
Using the previous two results, we conclude that dsm is a metric on the space of
semimartingales. We will show that this metric also induces the Emery topology. The first
step is to show that the space of semimartingales is complete in this metric.
A
Theorem 11.19. Let X n be a sequence of semimartingales that is Cauchy in dsm metric.
Then there exists a semimartingale X such that dsm (X n , X) ! 0.
R
Proof. By taking a subsequence if necessary, we assume that X n is such that (writing

X 0 = 0)
dsm (X n , X n 1
)2 n
. (11.4.3)
D
For n 1, let V n 2 V+ be dominating process for X n Xn 1 such that
ducp (V n , 0)  dsm (X n , X n 1
)+2 n
 2.2 n
. (11.4.4)
Thus there exists a decomposition X n X n 1 = M n + An with M n being a locally square

integrable martingale with M0n = 0, An 2 V and such that U n defined by
p p
Utn = Vtn 2 2([M n , M n ]t + hM n , M n it )1/2 2|An |t (11.4.5)
is an increasing process with U0n 0. In particular, for all n, t

p p
2 2([M n , M n ]t + hM n , M n it )1/2 + 2|An |t  Vtn (11.4.6)
As in Lemma 11.17, we can conclude that

X1
Vt = Vtn < 1 8t < 1. (11.4.7)
n=1
Pm P1
Let us define Btm = n
n=1 At and Bt =
n
n=1 At . Then
X1
|B B m |t  |An |t . (11.4.8)
n=m+1
In view of (11.4.6) and (11.4.7), it follows that D defined by
X1
Dt = (hM n , M n it )1/2
n=1
satisfies Dt  Vt , is a predictable increasing process, and D0 = 0. Thus D is locally
bounded and we can get stop times j increasing to infinity such that D j is bounded (say
T
by cj ) for each j. Let
X1
Dtm = (hM n , M n it )1/2 .
n=m+1
Dm
Then j
D j
Let us define N m as follows: N 0 = 0 and

F
 cj and converges to zero almost surely and as a consequence
lim E[Dmj ] = 0
m!1
(11.4.9)
A
m
X
m
N = M n.
n=1
Then N m is also a locally square integrable martingale and X m = M m + B m . Noting that
R
P
N k N m = kn=m+1 M n and hence using (11.3.23) we get
k
X k
X
k m k m 1/2 n
(hN N ,N N it ) = (h M , M n it )1/2
D
n=m+1 n=m+1
k
X (11.4.10)
 (hM n , M n it )1/2
n=m+1
 Dtm
and thus in view of (11.4.9), we have
lim E[ sup hN k N m, N k N m i j ] = 0. (11.4.11)
m!1 k>m
In turn, using the Doob’s maximal inequality, we get
lim E[ sup sup |Ntk Ntm |2 ] = 0. (11.4.12)
m!1 k>m t j
Invoking arguments given in Lemma 2.72, it follows that N k converges in ucp-metric to an

r.c.l.l. adapted process N . Further,
lim E[sup |Nt Ntm |2 ] = 0. (11.4.13)

m!1 t j
Thus N is a locally square integrable martingale and using arguments as in (11.4.10) we

have
(hN N m , N N m it + [N N m, N N m ]t )1/2
= lim(hN k N m, N k N m it + [N k N m, N k N m ]t )1/2
k (11.4.14)
k
X
 lim ([M n , M n ]t + hM n , M n it )1/2
k
n=m+1
Let us define X = N + B. Then X is a semimartingale. Further, X X m = N N m +
T
B B m and thus U m defined by
p p
U m = 2 2([N N m , N N m ]t + hN N m , N N m it )1/2 + 2|B B m |t
is a dominating process for X X m . Using (11.4.6), (11.4.8), (11.4.14), it follows that
Utm 
F1
X
n=m+1
Vtn .
A
P1
In view of (11.4.7), it follows that n=m+1 Vtn converges to zero almost surely (as m ! 1).
Thus, Utm converges to 0 in probability, and so dsm (X, X m ) converges to 0 completing the
proof.
R
The next result connects convergence in dsm with that in dem .
Lemma 11.20. Suppose X n , X are semimartingales such that

D
1
X
dsm (X n , X) < 1. (11.4.15)
n=1
Then dem (X n , X) ! 0.
Proof. Let V n be a dominating process for X n X such that
ducp (V n , 0)  dsm (X n , X) + 2 n
.
Then as seen in the proof of Lemma 11.17,

1
X
Ut = Vtn < 1 8t.
n=1
Let j = inf{t > 0 : Ut j or Ut j}. Then

1
X
U j = V nj j
n=1
and hence for each j,
lim E[(V nj )2 ] = 0. (11.4.16)
n!1
Now for any predictable process f bounded by 1, we have
Z t Z t
n
E[sup | f dX f dX| ]  2E[(V nj )2 ] (11.4.17)
t< j 0 0
Given T < 1, ⌘ > 0 and " > 0, get j such that

1
T)  " P( j (11.4.18)
2
and using (11.4.16) and (11.4.17) for this fixed j, getn0 such that for n n0
T
Z t Z t
n 1
P(sup | f dX f dX| ] ⌘)  " (11.4.19)
t< j 0 0 2
Recall that choice of n0 is independent of f and thus (note: S1 is the set of bounded
predictable processes bounded by 1) for n n0 we have
Z t
sup P(sup| f dX n
Z t
f dX| ] ⌘)
F
A
f 2S1 tT 0 0
Z t Z t
n
 sup P(sup | f dX f dX| ] ⌘) + P( j T)
f 2S1 t< j 0 0
R
"
As noted in the proof of Lemma 4.100, this shows dem (X n , X) ! 0.
Now we are in a position to prove that dsm and dem give rise to the same topology.
D
In other words, dsm is also a metric for the Emery topology.
Theorem 11.21. For semimartingales X n , X

dsm (X n , X) ! 0 if and only if dem (X n , X) ! 0.
Proof. Let X n , X be such that dsm (X n , X) ! 0. We will first show that dem (X n , X) ! 0.
k
Take any subsequence {nk } and let Y k = X n . Since dsm (Y k , X) ! 0, we can choose a
m
subsequence {k m } such that Z m = Y k satisfies
1
X
dsm (Z m , X) ! 0.
k=1
Now Lemma 11.20 yields that dem (Z m , X) ! 0.. Thus the sequence {X n } satisfies the
property that given any sub-sequence, there exists a further subsequence that converges to
X in dem metric. Hence dem (X n , X) ! 0.
From the definition of the metrics dem and dsm , it follows that the space of semi-
martingales is a linear topological space under each. Further, we have shown that the
space is complete under each of the metric. The identity mapping being continuous is then
a homeomorphism in view of the Open mapping theorem.
The following result gives a technique to prove almost sure convergence of stochastic
integrals.
Theorem 11.22. Suppose X n , X are semimartingales such that

V n dominates (X n X) (11.4.20)
T
and
1
X
(Vtn )2 < 1 8t < 1. (11.4.21)
n=1
X
[ sup |ftn ft |2 ] < 1 a.s.
n=1 0tT
F
Suppose f n , f locally bounded predictable f , such that for all T < 1
1
(11.4.22)
A
Then for all T < 1
1
X Z t Z t
n n
[ sup | f dX f dX|2 ] < 1 a.s. (11.4.23)
n=1 0tT 0 0
R
Z t Z t
n n
lim [ sup | f dX f dX|2 ] = 0 a.s. (11.4.24)
n!1 0tT 0 0
D
Proof. Let W be a dominating process for X and let

v v
u1 u1
uX uX
Vt = Wt + t (V )2 + t [ sup |f n
n
t s fs |2 ] + sup |fs |.
n=1 n=1 0st 0st
For j 1, let
⌧j = inf{t 0 : Vt j or Vt j}.
Now noting that sup0s<⌧j |fs |  j,
sup |fsn |  sup |fs | + sup |fsn fs |
0s<⌧j 0s<⌧j 0s<⌧j
 2j,
the fact that V is a dominating process for X n X as well as for X and that V⌧j  j we
have (using (11.3.35))
Z t Z t
n n
E[ sup | f dX f n dX|2 ]  2j 2 E[(V⌧nj )2 ]
0t<⌧j 0 0
Z t Z t
E[ sup | f n dX f dX|2 ]  2j 2 E[ sup |fsn fs |2 ]
0t<⌧j 0 0 0s<⌧j
and hence
1
X Z t Z t
E[ sup | f n dX n f dX|2 ]
n=1 0t<⌧j 0 0
Z t Z t Z t Z t
n n n 2 n
 2E[ sup | f dX f dX| ] + 2E[ sup | f dX f dX|2 ]
0t<⌧j 0 0 0t<⌧j 0 0
1
X (11.4.25)
T
 4j 2 [E[(V⌧nj )2 ] + E[ sup |fsn fs |2 ]]
n=1 0s<⌧j
 4j 2 E[2V⌧2j ]
 8j 4 .
This shows that for all j
1
X Z t
F Z t
A
n n
sup | f dX f dX|2 < 1 a.s.
n=1 0t<⌧j 0 0
Since ⌧j increases to 1, this implies (11.4.23) which in turn implies (11.4.24).

R
D
Chapter 12
SDE driven by r.c.l.l. Semimartingales
In this Chapter, we will consider stochastic di↵erential equations as in section 7.3 where
T
the driving semimartingale need not be continuous.
We will consider the SDE (7.3.1), where b would be as in the section 7.3 but Y would
be an r.c.l.l. semimartingale. We will continue to use the conventions used in that section
F
on matrix-vector-valued processes and stochastic integrals.
Here we will use the Metivier-Pellaumail inequality and the notion of dominating pro-
cess introduced earlier and we will see that invoking these, the proofs of existence and
A
uniqueness is essentially same as in the case of SDE’s driven by Brownian Motion. In
section 7.3 we had used random time change to achieve the same.
We begin with an analogue of the Gronwall’s inequality, a key step in study of di↵er-
ential equations.
R
12.1 Gronwall Type Inequality

D
We will obtain an analogue of Gronwall’s inequality that would be useful in dealing with
the stochastic di↵erential equations driven by semimartingales in the next section. The
first one is from Metivier [MeP] and the second one is essentially based on the same idea.
Theorem 12.1. Let A, B 2 V+ (increasing processes with A0 0, B0 0) and a stop
time ⌧ be such that B⌧  M . Suppose that for all stop times  ⌧
Z
E[A ]  a + E[ A dB]. (12.1.1)
[0, )
P[↵] j.
For ↵ > 0 let C(↵) = j=0 ↵ Then we have
E[A⌧ ]  2aC(2 M ) (12.1.2)
367
368 Chapter 12. SDE driven by r.c.l.l. Semimartingales
1
Proof. Let us define Vt = M Bt . Then V⌧  1 and we have
Z
E[A ]  a + M E[ A dV ] (12.1.3)
[0, )
For integers i 1, let ⌧i = inf{t 0 : At i or At i} ^ ⌧ . Note that A⌧i  i, ⌧i " ⌧
and since A is increasing process, it follows that
E[A⌧i ] ! E[A⌧ ] as i ! 1. (12.1.4)
1
Fix i and = 2 M and let k be defined inductively by 0 = 0 and for k 0
k+1 = inf{t > k : (Vt V k) or (Vt V k) } ^ ⌧i (12.1.5)
If k+1 < ⌧i , then (V k+1
V k) and hence
N = ⌧i , for N = [2 M ] + 1. (12.1.6)
Moreover, for all k, (V k+1 V k)  .
T
For k 0, let Zk = A k and k = E[Zk ]. Then
Z Z
E[Zk+1 ]  a + M E[ As dVs ] + M E[( As dVs ]
[0, k) [ k , k+1 )
 a + M E[Zk ] + M E[Zk+1 ]
1
 a + M E[Zk ] + E[Zk+1 ]
2
F
A
Thus we have for k 1 (note that a priori we know that A k+1
 i and hence k+1 is
finite)
k+1  2a + 2 M k.
R
Likewise, we can conclude that 1 = E[Z1 ]  2a. Then by induction it follows that
k
X
k+1  2a(1 + (2 M )j ).
j=1
D
Thus invoking (12.1.6), we have E[A⌧i ] = N  2aC(2 M ). In view of (12.1.4), this

completes the proof of (12.1.2).
The next result is an analogue of the inequality obtained in Theorem 12.1.
Theorem 12.2. Let A, B 2 V+ (increasing processes with A0 0, B0 0) and a stop

time ⌧ be such that B⌧  M and for all stop times  ⌧
E[(A )2 ]  a + E[(✓ (A , B))2 ] (12.1.7)
P[↵] j.
For ↵ > 0, let C(↵) = j=0 ↵ Then we have
E[(A⌧ )2 ]  3aC( M 2 ) (12.1.8)
12.1. Gronwall Type Inequality 369
1
Proof. Let us define Vt = M Bt . Then V⌧  1 and we have
E[(A )2 ]  a + M 2 E[(✓ (A , V ))2 ] (12.1.9)
For integers i 1, let ⌧i = inf{t 0 : At i or At i} ^ ⌧ . Note that A⌧i  i, ⌧i " ⌧
and since A is increasing process, it follows that
E[A2⌧i ] ! E[A2⌧ ] as i ! 1. (12.1.10)
1
Fix = 10 M 2
and let k be defined inductively by 0 = 0 and for k 0
k+1 = inf{t > k : (Vt V k) or (Vt V k) } ^ ⌧i (12.1.11)

If k+1 < ⌧i , then (V k+1 V k ) and hence N = ⌧i , for N = [10 M 2 ] + 1. Moreover,
for all k, (V k+1 V k )  . Noting that for f 0
Z Z
2 2 2
(✓t (f, V ))  2 fs dVs + 2Vt fs2 dVs
T
[0,t) [0,t)
and using the inequality (12.1.9), we have (writing Ut = Vt2 for convenience)
E[(A k+1
)2 ]  a + M 2 E[(✓ k+1
(A , V ))2 ]
Z Z
For k 0, let Zk = (A k
 a + 2bE[(
and )2 k
[0, k+1 )
F
A2t
= E[Zk ] = E[(A
dUt +
k
[0, k+1 )
)2 ].
A2t dVt )].
Since k  ⌧i , k
(12.1.12)
is finite for
A
each k. Using (12.1.12) for k 1
Z Z
2
k+1  a + 2 M E[( A2t dUt + A2t dVt )]
[0, k) [0, )
Z Zk
R
+ 2 M 2 E[( A2t dUt + A2t dVt )]

[
(12.1.13)
k, k+1 ) [ k, k+1 )
 a + 2 M 2 E[Zk (U k
U0 ) + Zk (V k
V0 )]
D
+ 2 M 2 E[Zk+1 (U k+1
U k ) + Zk+1 (V k+1
V k )]
Using Ut  1, Vt  1 for all t < ⌧ and (V k+1
V k)  and
(U k+1
U k ) = (V k+1
V k )(V k+1
+ V k)  2
the inequality (12.1.13) yields
k+1 a + 2 M 2 (2 k ) + 2 M 2 (3 k+1 )
6 (12.1.14)
a + 4 M 2 k + k+1
10
Thus, for k 1
10
k+1  a + 10 M 2 k  3a + 10 M 2 .
4
Same argument as above also yields 1  3a. Thus by induction it follows that
k
X
k+1  3a[ (10 M 2 )j ]. (12.1.15)
j=0
Since N = ⌧i as noted earlier, it follows that N = E[(A⌧i )2 ]. Thus (12.1.15) implies

that, writing ↵ = 10 M 2 ,
[↵]
X
2
E[(A⌧i )  3a[ ↵j ]
j=0
This proves the required estimate in view of (12.1.10).
T
Let Y 1 , Y 2 , . . . Y m be r.c.l.l. semimartingales w.r.t. the filtration (F⇧ ). Here we will consider
an SDE
dUt = b(t, ·, U )dYt , t 0, U0 = ⇠0 (12.2.1)
F
where the functional b is given as follows. Recall that Dd = D([0, 1), Rd ). Let B(Dd ) be
the smallest -field on Dd under which the coordinate mappings are measurable. Let
A
a : [0, 1) ⇥ ⌦ ⇥ Dd ! L(d, m) (12.2.2)
be such that for all t 2 [0, 1),
(!, ↵) 7! a(t, !, ↵) is Ft ⌦ B(Dd ) measurable, (12.2.3)

R
for all (!, ↵) 2 ⌦ ⇥ Dd ,

t 7! a(t, !, ↵) is an r.c.l.l. mapping (12.2.4)
D
and suppose there there is an increasing r.c.l.l. adapted process K such that for all
↵, ↵1 , ↵2 2 Dd ,
sup ka(s, !, ↵)k  Kt (!) sup (1 + |↵(s)|) (12.2.5)
0st 0st
sup ka(s, !, ↵2 ) a(s, !, ↵1 )k  Kt (!) sup |↵2 (s) ↵1 (s)|. (12.2.6)

0st 0st
Let b : [0, 1) ⇥ ⌦ ⇥ Dd ! L(d, m) be given by
b(s, !, ↵) = a(s , !, ↵). (12.2.7)
Lemma 12.3. Suppose a satisfies (12.2.2)-(12.2.6). Then we have

(i) For an r.c.l.l. (F⇧ ) adapted process V , Z defined by Zt = b(t, ·, V ) ( i.e. Zt (!) =
a(t, !, V (!)) ) is an r.c.l.l. (F⇧ ) adapted process.
(ii) For any stop time ⌧ ,
(!, ⇣) 7! a(⌧ (!), !, ⇣) is F⌧ ⌦ B(Cd ) measurable (12.2.8)
Proof. For part (i), let us define a process V t by Vst = Vs^t . Note that in view of (12.2.6),
Zt = a(t, ·, V t ). The fact that ! 7! V t (!) is Ft measurable along with (12.2.3) implies
that Zt is also Ft measurable. For part (ii), when ⌧ is a simple stop time, (12.2.8) follows
from (12.2.3). For a general bounded stop time ⌧ , the conclusion (12.2.8) follows by
approximating ⌧ from above by simple stop times and using right continuity of a(t, !, ⇣).
For a general stop time ⌧ , (12.2.8) follows by approximating ⌧ by ⌧ ^ n.
T
Recall that we had introduced matrix-vector-valued processes and stochastic integral
R
F
f dX where f, X are matrix-vector- valued while dealing with SDEs driven by continuous
semimartingales. We will continue to use the same convention and notions. As in the case
of continuous semimartingales, here too, an r.c.l.l. (Rd -valued) adapted process U is said
A
to be a solution to the equation (12.2.1) if
Z t
Ut = U0 + b(s, ·, U )dYs (12.2.9)
0
R
i.e. for 1  j  d,
m Z
X t
Utj = U0j + bjk (s, ·, U )dYsk
D
k=1 0+
where U = (U 1 , . . . , U d ) and b = (bjk ).

Let us recast the growth estimate in matrix-vector form for later use:
Lemma 12.4. Let X = (X 1 , X 2 , . . . X m ), where X j is a semimartingale for each j, 1 

j  m. Suppose V is a dominating process for each of X j , 1  j  m. Then for any
locally bounded L(d, m)-valued predictable f , and a stop time , one has
Z s
E[ sup | f dX|2 ]  dm2 E[✓⌧2 (kf k, V )]. (12.2.10)
0s ^T 0+
Proof.
Z s
E[ sup | f dX|2 ]
0s ^T 0+
d
X m Z
X s
= E[ sup | fjk dX k |2 ]
j=1 0s ^T k=1 0+
d X
X m Z s
m E[ sup | fjk dX k |2 ]
j=1 k=1 0s ^T 0+
d X
X m
m E[✓⌧2 (fjk , V )].]
j=1 k=1
 dm2 E[✓⌧2 (kf k, V )].
T
We are now in a position to prove uniqueness of solution to the SDE (12.2.1). The
F
proof is essentially the same as for SDE driven by Brownian motion or by a continuous
semimartingale. Here we use the growth estimate (7.3.11) in place of (3.4.4) or (7.2.3)
for a continuous semimartingale satisfying (7.2.2). The technique of time change used for
A
continuous semimartingale is replaced here by the notion of dominating process and the
estimate in Theorem 12.2 replacing Gronwall’s lemma - Lemma 3.23.
Lemma 12.5. Let Y 1 , Y 2 , . . . Y m be r.c.l.l. semimartingales w.r.t. the filtration (F⇧ ). Let
R
a satisfy (12.2.2) - (12.2.6) and let b be defined by (12.2.7). Suppose H and G be r.c.l.l.
adapted processes and let X and Z satisfy
Z t
D
X t = Ht + b(s, ·, X)dYs (12.2.11)

0+
Z t
Z t = Gt + b(s, ·, Z)dYs . (12.2.12)
0+
Let V be a (common) dominating process for Y j , 1  j  m and let be a stop time such
that V  M and K  . Then
E[ sup |Xt Zt |2 ]  2E[ sup |Ht Gt |2 ]C(2dm2 2

M 2) (12.2.13)
0s< 0s<
where C(↵) is as in Theorem 12.2

Proof. Using (12.2.11) and (12.2.12), we have
E[ sup |Xt Zt |2 ] 2E[ sup |Ht Gt | 2 ]

0s< 0s<
Z t
+ 2E[ sup | (b(s, ·, Z) b(s, ·, X))dY |2 ]
0t< 0
Using the Lipschitz condition (12.2.6), the fact that K  , it follows that for s <
k(b(s, ·, Z) b(s, ·, X)k  sup |Xt Zt |.

0t<s
Thus writing As = sup0ts |Xt Zt |, we get for any stop time ⌧  , using (12.2.10),
E[A2⌧ ]  2E[ sup |Ht Gt | 2 ] + 2 2

dm2 E[✓⌧2 (A , V )].
0s<
Now V  M and Theorem 12.2 together imply the required estimate (12.2.13).
T
This result immediately leads to:
F
Theorem 12.6. Let Y 1 , Y 2 , . . . Y m be r.c.l.l. semimartingales w.r.t. the filtration (F⇧ ). Let
a satisfy (12.2.2) = (12.2.6) and let b be defined by (12.2.7). Let H be an adapted r.c.l.l.
process. Suppose X and Z satisfies
A
Z t
X t = Ht + b(s, ·, X)dYs (12.2.14)
0+
Z t
R
Z t = Ht + b(s, ·, Z)dYs (12.2.15)

0+
Then X = Z.
D
Proof. Let V be a common dominating process for Y j , 1  j  m. Let Ut = Vt + Kt and

n be defined by
n = inf{t 0 : Ut n or Ut n}.
Then n increases to 1. Since V n  n and K n  n, Lemma 12.5 implies
E[ sup |Xt Zt |2 ] = 0
0s< n
for n 1. This proves X = Z.
The same proof essentially yields the following

a satisfy (12.2.2) = (12.2.6) and let b be defined by (12.2.7). Let H be an adapted r.c.l.l.
process. Suppose ⌧ is a stop time and X and Z satisfies
Z t^⌧
Xt^⌧ = Ht^⌧ + b(s, ·, X)dYs (12.2.16)
0+
Z t^⌧
Zt^⌧ = Ht^⌧ + b(s, ·, Z)dYs (12.2.17)
0+
Then
P(Xt^⌧ = Zt^⌧ 8t) = 1. (12.2.18)
Proof. Let V be a common dominating process for Y j , 1  j  m. Let Ut = Vt + Kt and

n be defined by
T
n = inf{t 0 : Ut n or Ut n} ^ ⌧.
Then n increases to ⌧ . Since V n  n and K n  n, Lemma 12.5 implies
E[ sup |Xt Zt |2 ] = 0
for n
this.
0s< n
F
1. This proves P(Xt = Zt 8t < ⌧ ) = 1. The required result (12.2.18) follows from
A
Having proven uniqueness of solution to the SDE (12.2.14), we now move onto proving
existence of solution to the equation. We will show this by showing that Picard’s successive
R
approximation method converges to a solution of the equation. The proof will be very
similar to the proof in the Brownian motion case.
D
a satisfy (12.2.2) = (12.2.6) and let b be defined by (12.2.7). Let ⇠0 be a F0 measurable

random variable. Then there exists an adapted r.c.l.l. process such that (12.2.14) holds. In
other words, existence and uniqueness holds for the SDE (12.2.14).
[0]
Proof. Let Xt = Ht for all t 0 and for n 1 let X [n] be defined inductive as follows:
Z t
[n]
X t = Ht + b(s, ·, X [n 1] )dYs (12.2.19)
0+
Then note that
Z t
[n+1] [n]
Xt Xt = (b(s, ·, X [n] ) b(s, ·, X [n 1]
))dYs . (12.2.20)
0+
As in the proof of Lemma 12.5, let V be a (common) dominating process for Y j , 1  j  m.

Let
Ut = Vt + Vt2 + sup |Hs | + Kt
0st
where K is as in conditions (12.2.6) and (12.2.5) and let j be the stop times defined by
j = inf{t 0 : Ut j or Ut j}.
Note that j " 1 as j " 1. For n 0 let

[n]
At = sup |Xs[n+1] Xs[n] |.
0st
For s < j,
[n 1]
k(b(s, ·, X [n] ) b(s, ·, Xs[n 1]
)k  jAs
T
and thus using (12.2.20) along with the estimate (12.2.10), we get for any stop time ⌧  j,
for n 1 (using (11.3.28) for the last step)
[n] [n+1] [n]
E[(A⌧ )2 ] = E[sup|Xt Xt | 2 ]
t<⌧
Z t
= E[sup| (b(s, ·, X [n] ) b(s, ·, Xs[n
t<⌧ 0
 dm j E[✓⌧2 (A[n 1] , V )
2 2
F 1]
)dYs |2 ]
A
(12.2.21)
Z Z
2 2 [n 1] 2 2 [n 1] 2
 2dm j E[ (As ) dVs + Vt (As ) dVs ]
[0,⌧ ) [0,⌧ )
Z
[n 1] 2
R
2 3
 4dm j E[ (As ) dDs ]
[0,⌧ )
P1 n (A[n] )2 ,
where Ds = Vs2 + Vs . Hence writing Bt = n=0 4 t we thus get for any stop time
⌧ j
D
Z
[0]
E[B⌧ ]  E[A⌧ ] + 16dm2 j 3 E[ Bs dU ] (12.2.22)
[0,⌧ )
[0]
Also, recalling that |Xt | = |Ht |  j for all t < j, we have
[0] [1] [0]
E[A⌧ ] = E[sup|Xt Xt | 2 ]
t<⌧
Z t
= E[sup| b(s, ·, X [0] )dY |2
t<⌧ 0
2 2
 dm E[✓⌧ (j, V )]
 dm2 j 4 .
Using (12.2.22) we get for any stop time ⌧  j

Z
2 4 2 3
E[B⌧ ]  dm j + 16dm j E[ Bs dU ]
[0, ⌧ )
and then using the version of Gronwall inequality given in Theorem 12.1, we conclude
E[B j ] < 1.
Thus, for each j 1,

1
X [n]
4n E[(A j
)2 ] < 1
n=0
[n]
and as a consequence, for large n, E[(A j )2 ]  4 n and hence
X1 q X1
[n] 2
E[(A j ) ] = k[ sup |Xs[n+1] Xs[n] | ] k2 < 1 (12.2.23)
s< j
T
n=0 n=0
The relation (12.2.23) implies
1
X
k[ sup |Xs[n+1] Xs[n] | ] k2 < 1 (12.2.24)
as well as
supk[ sup |Xs[n+k]

n=0
s< j
Xs[n] | ]k2  supk[

Fn+k
X
sup |Xs[j+1] Xs[j] | ]k2
A
k 1 s< j k 1 s< j
j=n+1
1
X (12.2.25)
[ k( sup |Xs[n+1] Xs[n] |)k2 ]
s< j
j=n+1
R
P1 [n+1] [n]
Let N = [1
j=1 {! : n=1 sups< j
|Xs (!) Xs (!)| = 1}. Then by (12.2.24) P(N ) = 0
D
[n]
and for ! 62 N , Xs (!) converges uniformly on [0, j (!)) for every j < 1. So let us define
X as follows: 8
<lim [n] c
n!1 Xt (!) if ! 2 N
Xt (!) =
:0 if ! 2 N.
Since P(N ) = 0, it follows that
X [n] converges to X uniformly on compact subsets of [0, 1) a.s. (12.2.26)
In view of (12.2.25), it also follows that
lim E[( sup |Xs Xs[n] | ])2 ] = 0. (12.2.27)

n!1 s< j
12.3. Pathwise Formula for solution to an SDE 377
Recalling the Lipschitz condition (12.2.6) and the fact that K j  j, we have
sup k(b(s, ·, X) b(s, ·, X [n] ))k  j sup |Xs Xs[n] |. (12.2.28)

s< j s< j
As a consequence, writing fsn = b(s, ·, X) b(s, ·, X [n] )

Z t Z t
E[sup | (b(s, ·, X)dYs b(s, ·, X [n] )dYs |2 ]  E[✓2j (f n , V )]
t< j 0 0
 j 2 .j 2 E[ sup |Xs Xs[n] |2 ]

s< j
! 0 as n ! 1.
This along with (12.2.19) and (12.2.26) yields that
Z t
X t = Ht + (b(s, ·, X)dYs ,
0
T
in other words X is a solution to the equation (12.2.14).
By modifying the successive approximation scheme (evaluating the integral defining

X [n]
F
approximately) we can obtain a pathwise formula for the solution to the SDE as ob-
tained in Section 7.4 for the case of SDE’s driven by continuous semimartingales. However,
this approximation involves a iterated limit.
A
12.3 Pathwise Formula for solution to an SDE
R
In this section, we will consider the SDE
dXt = g(t, G, X)dY (12.3.1)
where f, g : [0, 1) ⇥ Dr ⇥ Dd 7! L(d, m) are such that

D
8( , ↵) 2 Dr ⇥ Dd , t 7! f (t, , ↵) is an r.c.l.l. function, (12.3.2)
and g is related to f via

g(t, , ↵) = f (t , , ↵) (12.3.3)
and G is an Rr -valued r.c.l.l. adapted process and X is a semimartingale. Here for an

integer k, Dk = D([0, 1), Rk ).
Recall that B(Dk ) - the Borel -field for the topology of uniform convergence on compact
subsets - is also generated by the coordinate mappings. We assume that
f is measurable w.r.t. B([0, 1)) ⌦ B(Dr ) ⌦ B(Dd ). (12.3.4)

For t < 1, ↵ 2 Dd and 2 Dr , let ↵t (s) = ↵(t ^ s) and t (s) = (t ^ s) and we assume
that f satisfies
t
f (t, , ↵) = f (t, , ↵t ), 8 2 Dr , ↵ 2 Dd , 0  t < 1. (12.3.5)
We also assume that there exists a function C : [0, 1) ⇥ Dr 7! R measurable w.r.t.

B([0, 1)) ⌦ B(Dr ) such that 8 2 Dr , ↵, ↵1 , ↵2 2 Dd , 0  t  T
kf (t, , ↵)k  C(t, )(1 + sup |↵(s)|) (12.3.6)

0st
kf (t, , ↵1 ) f (t, , ↵2 )k  C(t, )( sup |↵1 (s) ↵2 (s)|) (12.3.7)

0st
and for all 2 Dr ,

t ! C(t, ) is r.c.l.l. (12.3.8)
T
As in section 6.2, we will now obtain a mapping
: Dd ⇥ Dr ⇥ Dm 7! D([0, 1), Rd )
such that for adapted r.c.l.l. process H, G (Rm , Rr -valued respectively) and an r.c.l.l. semi-
martingale Y ,
X=
F
(H, G, Y )
A
yields the unique solution to the SDE
Z t
X t = Ht + g(s, G, X)dY. (12.3.9)
0
R
We will define mappings

(n)
: Dd ⇥ Dr ⇥ Dm 7! D([0, 1), Rd )
inductively for n 1. Let (0) (⌘, , ↵)(s) = ⌘ for all s 0 and having defined (0) , (1) , . . . ,
D
(n 1) , we define (n) as follows. Fix n and ⌘ 2 D , 2 Dr and ↵ 2 Dd .

m
(n) (n) (n)
Let t0 = 0 and let {tj : j 1} be defined inductively as follows: ({tj : j 1} are
themselves functions of (⌘, , ↵), which are fixed for now and we will suppress writing it as
(n) (n) (n)
a function) if tj = 1 then tj+1 = 1 and if tj < 1 then writing
(n 1) (n 1)
(⌘, , ↵)(s) = f (s, ↵, (⌘, , ↵))
let
(n) (n) (n 1) (n 1) (n) n
tj+1 = inf{t tj :k (⌘, , ↵)(s) (⌘, , ↵)(tj )k 2
(n 1) (n 1) (n) n
or k (⌘, , ↵)(s ) (⌘, , ↵)(tj )k 2 }
12.3. Pathwise Formula for solution to an SDE 379
(n 1) (⌘, (n)
(since , ↵) is an r.c.l.l. function, tj " 1 as j " 1) and
1
X
(n) (n 1) (n) (n)
(⌘, , ↵)(s) = ⌘ + (⌘, , ↵)(s)(↵(t ^ tj+1 ) ↵(t ^ tj )).
j=0
This defines (n) (⌘,

, ↵). Now we define
8
<lim (n) (⌘, , ↵) if the limit exists in ucc topology
n
(⌘, , ↵) = (12.3.10)
:0 otherwise.
Now it can be seen that
a(s, !, ↵) = f (s, G(!), ↵), b(s, !, ↵) = g(s, G(!), ↵)
satisfies (12.2.2)-(12.2.7) with Kt (!) = C(t, G(!)). Let
T
X(!) = (H(!), G(!), Y (!)). (12.3.11)
Note the an ! path of X has been defined directly in terms of the ! paths of G, H, Y via
the functional . We will prove
(0)
F
Theorem 12.9. X defined by (12.3.11) is the (unique) solution to the SDE (12.3.9).
Proof. Let Zt = H0 . The processes Z (n) are defined by induction on n. Assuming that
A
Z (0) , . . . , Z (n 1) have been defined, we now define Z (n) : Fix n.
(n) (n) (n)
Let ⌧0 = 0 and let {⌧j : j 1} be defined inductively as follows: if ⌧j = 1 then
(n) (n)
⌧j+1 = 1 and if ⌧j < 1 then
R
(n) (n) (n)

⌧j+1 = inf{s ⌧j : kf (s, G, Z (n 1)
) f (⌧j , G, Z (n 1)
)k 2 n
(n)
(12.3.12)
or kf (s , G, Z (n 1)
) f (⌧j , G, Z (n 1)
)k 2 n
}.
D
(n)
Since the process s 7! f (s, G, Z (n 1) ) is an adapted r.c.l.l. process, it follows that each ⌧j
(n) (n) (n) (n)
is a stop time and limj"1 ⌧j = 1. Let Z0 = H0 and for j 0, ⌧j < t  ⌧j+1 let
(n) (n) (n)
Zt =Z (n) + f (⌧j , G, Z (n 1)
)(Yt Y⌧ (n) ).
⌧j j
Equivalently,
1
X
(n) (n)
Zt = Ht + f (⌧j , G, Z (n 1)
)(Yt^⌧ (n) Yt^⌧ (n) ) (12.3.13)
j+1 j
j=0
It can be seen from the respective definitions that
Z (n) (!) = (n)

(H(!), G(!), Y (!)).
Thus to complete the proof, suffices to show that Z (n) converges to a solution Z of the
SDE (12.3.9). Uniqueness would then imply that Z = X.
For n 1, let us define W n and S n by
1
X
(n) (n)
St = f (⌧j , G, Z (n 1)
)1[⌧ (n) ,⌧ (n) ) (t) (12.3.14)
j j+1
j=0
Z t
(n)
Wt = Ht + f (s , G, Z (n 1)
)dYs . (12.3.15)
0
Let us note that

Z t
(n) (n)
Zt = Ht + Ss dYs (12.3.16)
T
0
(n)
Noting that by definition of {⌧j : j 1},
kSt f (t, G, Z (n
F 1)
)k  2
As in the proof of Theorem 12.8, let V be a (common) dominating process for Y j , 1  j 

n
. (12.3.17)
A
m. Let
Ut = Vt + Vt2 + sup |Hs | + Kt

0st
R
where Kt (!) = C(t, G(!)) and C is as in the Lipschitz and growth conditions (12.3.6) -
(12.3.7), Ds = Vs2 + Vs and let j be the stop times defined by
D
Note that j " 1 as j " 1. Using (12.3.15), (12.3.16), (12.3.17) and the fact that V j  j
along with the fact that V is a common dominating process for Y j , 1  j  m we get
(n) (n)
E[ sup |Wt Zt |2 ]  dm2 j 2 2 2n
(12.3.18)
0s< j
For n 0 let
[n]
At = sup |Zs[n+1] Zs[n] |.
0st
12.4. Euler-Peano approximations 381
For any stop time ⌧  j, for n 1 (using (11.3.28) for the last step)
[n] [n+1] [n]
E[(A⌧ )2 ] = E[sup|Zt Zt |2 ]
t<⌧
(n+1) (n+1) 2 (n) (n)
 3E[ sup |Wt Zt | ] + 3E[ sup |Wt Zt |2 ]
0s< j 0s< j
[n+1] [n]
+ 3E[sup|Wt Wt | 2 ]
t<⌧
Z t
2 2 2n
 6dm j 2 + 3E[sup| (g(s, G, Z [n] ) g(s, G, Zs[n 1]
)dYs |2 ] (12.3.19)
t<⌧ 0
 6dm2 j 2 2 2n
+ 3dm2 j 2 E[✓⌧2 (A[n 1] , V )
Z Z
[n 1] 2 [n 1] 2
 6dm2 j 2 2 2n + 6dm2 j 2 E[ (As ) dVs2 + Vt (As ) dVs ]
[0,⌧ ) [0,⌧ )
Z
[n 1] 2
 6dm2 j 2 2 2n + 12dm2 j 3 E[ (As ) dDs ]
T
[0,⌧ )
P1 n (A[n] )2 ,
Hence writing Bt = n=0 2 we thus get for any stop time ⌧  j
t
1
X Z
E[B⌧
[0]
]  E[A⌧ ] + 2n 6dm2 j 2 2 2n + 24dm2 j 3 E[
n=0
As in the proof of Theorem 12.8, it follows that

F
Bs dU ]
[0,⌧ )
(12.3.20)
A
[0]
E[A⌧ ]  dm2 j 4
and hence that

Z
R
2 2 4 2 2 2 3
E[(B⌧ )  dm j + 6dm j + 12dm j E[ (Bs )2 dDs ]. (12.3.21)
[0,⌧ )
Now proceeding exactly as in the proof of Theorem 12.8, we can conclude that Z (n) con-
verges to a solution Z of the equation (12.3.9). Once again from the definition, it follows
D
that Z = X a.s. completing the proof.
12.4 Euler-Peano approximations

We are going to show that Euler-Peano approximations (for the solution to the SDE (12.3.9)
converge to the solution and indeed converge almost surely and this yields a pathwise
formula for the solution. In the formula given in section 12.3, the approximation (n)
depended upon (n 1) whereas in the approximation constructed in this section, the ap-
proximation ˜ (n) is defined directly in terms of the coefficients and thus is preferable from
computational point of view as compared to the formula (12.3.10). These results were
obtained in [39]. The formulation given here is taken from [40]
We will essentially consider the framework as in section 12.2. Let Y 1 , Y 2 , . . . Y m be
r.c.l.l. semimartingales w.r.t. the filtration (F⇧ ), H be an r.c.l.l. adapted process. Consider
the SDE Z 1
U t = Ht + b(t, ·, U )dYt , (12.4.1)
0+
where the functional b is given as follows. Let
a : [0, 1) ⇥ ⌦ ⇥ Dd ! L(d, m) (12.4.2)
be such that for all t 2 [0, 1)
(!, ↵) 7! a(t, !, ↵) is Ft ⌦ B(Dd ) measurable, (12.4.3)
for all (!, ↵) 2 ⌦ ⇥ Dd ,
T
t 7! a(t, !, ↵) is an r.c.l.l. mapping (12.4.4)
and suppose there there is an increasing r.c.l.l. adapted process K such that for all
↵, ↵1 , ↵2 2 Dd ,
0st
sup ka(s, !, ↵2 )
F
sup ka(s, !, ↵)k  Kt (!) sup (1 + |↵(s)|)
0st
a(s, !, ↵1 )k  Kt (!) sup |↵2 (s)

(12.4.5)
↵1 (s)|. (12.4.6)
A
0st 0s<t
Note the slight di↵erence between (12.2.6) and (12.4.6)- here the sup on the right hand
side is over 0  s < t.
Let b : [0, 1) ⇥ ⌦ ⇥ Dd ! L(d, m) be given by
R
b(s, !, ↵) = a(s , !, ↵). (12.4.7)

As proved in Theorem 12.6, the SDE (12.4.1) admits a unique solution X under the con-
D
ditions (12.4.2) - (12.4.7).

Let us fix " > 0 and we will construct an " - approximation Z = Z " to the solution X of
the SDE. We will drop " from the notation here and in what follows till the next theorem,
where we will give an estimate on X Z = X Z " .
For i 1, let stop times ⌧i and processes Z i be defined inductively by:
⌧0 = 0 and Zt0 ⌘ H0
and having defined ⌧j , Z j for j  i, let
Ait = (Ht H⌧i + a(⌧i , ·, Z i )(Yt Y⌧i ))1[⌧i ,1) (t)
(12.4.8)
Bti = (a(t, ·, W i ) a(⌧i ·, W i ))1[⌧i ,1) (t)
⌧i+1 = inf{t > ⌧i : |Ait | " or |Ait | " or |Bti | " or |Bti | "}
and 8
<W i for t < ⌧i+1
t
Wti+1 =
: W i + Ai for t ⌧i+1 .
t ⌧i+1
Thus, W i+1 is a process that has jumps at ⌧1 , ..., ⌧i+1 and is constant on the intervals
[0, ⌧1 ), · · · , [⌧j , ⌧j+1 ), · · · [⌧i , ⌧i+1 ), [⌧i+1 , 1). Also W i and W i+1 agree on [0, ⌧i+1 ) by defini-
tion. For k 1 define Z k by Z0k = H0 and
8
<W k + H H⌧i + a(⌧i , ·, W k )(Yt Y⌧i ) for ⌧i  t < ⌧i+1
⌧i t
Ztk =
:Z k = W k for t ⌧ .
⌧k ⌧k k
As a consequence, we have
k 1
X
Ztk = Ht^⌧k + a(⌧i , ·, W k )(Yt^⌧i+1
T
Y⌧i ) (12.4.9)
i=0
Noting that for i  k, Wtk = Wti
for t  ⌧i and thus a(⌧i , ·, W k ) = a(⌧i , ·, W i ) and Ztk = Zti
for t  ⌧i . Thus Ztk Wtk = Ait
for ⌧i  t < ⌧i+1 . As a consequence, we have (using the
definition of the sequence {⌧i }),
|Ztk Wtk |  ".
Since W i and W i+1 agree on [0, ⌧i+1 ), we also have
F (12.4.10)
A
a(⌧i+1 ·, W i+1 ) = a(⌧i+1 ·, W i ). (12.4.11)
We will show later that ⌧i " 1. However, a priori it is not clear that this is so. The next
R
lemma is a crucial step in the proof.
Lemma 12.10. For an r.c.l.l. adapted processes U , let S be defined by

1
X
St = U⌧i 1[⌧i ,⌧i+1 ) (t). (12.4.12)
D
i=0
Then S is an r.c.l.l. adapted process.
Proof. Let = limi!1 ⌧i . Fix T < (!). For t 2 [0, T ], St (!) is a finite sum of r.c.l.l.
functions and hence is r.c.l.l. while if (!) < 1, then for t (!), St (!) = 0. Here we
have used the fact that if ⌧i < 1 then ⌧i < ⌧i+1 and as a consequence, ⌧i < for all i.
Thus only remains to show that when (!) < 1, the left limit of S at (!) exists. Fix
! such that a = (!) < 1. In this case, U⌧i (!) (!) ! Ua (!) and if tn " a with tn < a,
then Stn (!) is a subsequence of U⌧i (!) (!) and hence left limit of S· (!) at a exists and equals
Ua (!).
Let us define a mapping I : ⌦ ⇥ Dd ! Dd as follows:
I(!, ↵)(t) = ↵(⌧i (!)) for ⌧i (!)  t < ⌧i (!).
Lemma 12.10 ensures that I(!, ↵) is an r.c.l.l. function. We now define mapping J that
maps r.c.l.l. adapted processes into r.c.l.l. adapted processes by
J (U (!)) = I(!, U (!))
or equivalently,
1
X
J (U ) = U⌧i 1[⌧i ,⌧i+1 ) . (12.4.13)
i=0
Let us note that for all k 1, by definition of Z k , W k we have
J (Z k ) = W k . (12.4.14)
T
Let us define ã : [0, 1) ⇥ ⌦ ⇥ Dd ! L(d, m) as follows:
ã(t, !, ↵) = I(!, a(·, !, I(!, ↵))).
F
Easy to check that ã satisfies (12.2.2)-(12.2.6) and hence defining
b̃(t, !, ↵) = ã(t , !, ↵),

A
it follows from Theorem 12.6 that the SDE
Z t
Z t = Ht + b̃(s, ·, Z)dYs (12.4.15)
0+
R
admits a unique solution.

We can check (using (12.4.14)) that
1
X
k
ã(t, ·, Z ) = a(⌧i , ·, W k )1[⌧i ,⌧i+1 ) (t)
D
i=0
and so
1
X
k
b̃(t, ·, Z ) = a(⌧i , ·, W k )1(⌧i ,⌧i+1 ] (t).
i=0
Hence it follows from (12.4.9) that

Z t^⌧k
Ztk = Ht^⌧k + b̃(s, ·, Z k )dYs (12.4.16)
0
Then invoking Theorem12.7, we conclude
k
P(Zt^⌧ k
= Zt^⌧k 8t) = 1. (12.4.17)
Lemma 12.11.
lim ⌧i = 1 a.s.
i!1
Proof. The definition of the sequence {⌧j } gives that if ⌧i+1 < 1 then at least one of
|a(⌧i+1 , ·, W i ) a(⌧i , ·, W i )|, |a(⌧i+1 , ·, W i ) a(⌧i , ·, W i )|, |Z⌧i+1
i+1
Z⌧i+1
i
| and |Z⌧i+1
i+1
Z⌧i+1
i
|,
i
exceeds ". Since W , J (Z) and W i+1 agree on [0, ⌧i+1 ), using (12.4.6), it follows that
a(⌧i+1 , ·, W i ) = a(⌧i+1 , ·, W i+1 ) = a(⌧i+1 , ·, J (Z))
and likewise
a(⌧i+1 , ·, W i ) = a(⌧i+1 , ·, W i+1 ) = a(⌧i+1 , ·, J (Z)).
Thus if ⌧i+1 < 1, at least one of |Z⌧i+1 Z⌧i |, |Z⌧i+1 Z⌧i |,
|a(⌧i+1 , ·, J (Z)) a(⌧i , ·, J (Z))|, |a(⌧i+1 , ·, J (Z)) a(⌧i , ·, J (Z))| exceeds ". So if limi ⌧i =
< 1, either Zt or a(t, ·, J (Z)) would fail to have left limit at and this would contradict
T
the fact that J (Z) has r.c.l.l. paths or the assumptions on a. Thus = 1.
Now (12.4.16)-(12.4.17) along with Lemma 12.11 imply that Z satisfies

Z t
Z t = Ht +
F
b̃(s, ·, Z)dYs
0
We have suppressed " from notations but b̃ depends on {⌧i } which in turn depends upon
" and the process Z also depends upon ". Note that
(12.4.18)
A
1
X
b̃(s, ·, Z) = a(⌧i , ·, W i+1 )1(⌧i ,⌧i+1 ] (s)
i=0
and hence using the Lipschitz condition (12.4.6), definition of {⌧j } we get
R
1
X
kb(s, ·, Z) b̃(s, ·, Z)k = ka(s , ·, Z) a(⌧i , ·, W i+1 )k1(⌧i ,⌧i+1 ] (s)
i=0
1
X
D
= ka(s , ·, Z i+1 ) a(⌧i , ·, W i+1 )k1(⌧i ,⌧i+1 ] (s)

i=0
1
X
= ka(s , ·, Z i+1 ) a(s , ·, W i+1 )k1(⌧i ,⌧i+1 ] (s)
i=0 (12.4.19)
1
X
+ ka(s , ·, W i+1 ) a(⌧i , ·, W i+1 )k1(⌧i ,⌧i+1 ] (s)
i=0
X1
Ks |Z i+1 W i+1 |1(⌧i ,⌧i+1 ] (s) + "
i=0
(Ks + 1)"
Lemma 12.12. Let X be the solution to (12.4.1) and Z ⌘ Z " be as defined in preceding
paragraphs (satisfying (12.4.19)) for fixed ". Let V be a common dominating process for
Y j , 1  j  m. Let Ut = Vt + Kt (where K appears in condition (12.4.6) on a) and for
j 1 let j be defined by
Then there exists a constant k(j, d, m) depending only on j, d, m such that
E[ sup |Xt Zt |2 ]  "2 k(j, d, m) (12.4.20)

0s< j
Proof. Let us define

At = sup |Xt Zt |
0st
Now, for any ⌧  j
T
Z t
2
E[|A⌧ | ]  E[ sup | (b(s, ·, X) b̃(s, ·, Z))dY |2 ]
0t< 0+
Z t
 2E[ sup |
0t<
+ E[ sup |
0t<
0+
Z
F
(b(s, ·, X)
t
(b(s, ·, Z)
b(s, ·, Z))dY |2 ]
b̃(s, ·, Z))dY |2 ]
(12.4.21)
A
0+
2j 2 dm2 E[✓⌧2 (A , V )] + 2(j + 1)2 dm2 "2

Using Theorem 12.1, it now follows that
R
E[|A j |2 ]  4(j + 1)2 dm2 "2 C(4j 3 dm2 ) (12.4.22)

P[↵] j.
where C(↵) = j=0 ↵ Thus (12.4.20) holds with
k(j, d, m) = 4(j + 1)2 dm2 C(4j 3 dm2 ).

D
If X n denotes the approximation Z " for " = 2 n , then the estimate (12.4.22) along
with Lemma 6.1 imply that X n converges to the solution X of the SDE (12.4.1). This in
turn helps us obtain a pathwise formula for solution to the SDE (12.4.1).
We will essentially consider the framework from section 12.3 and obtain a pathwise
formula involving a single limit rather than an iterative limit. Let f, g : [0, 1) ⇥ Dr ⇥ Dd 7!
L(d, m) be such that
8( , ↵) 2 Dr ⇥ Dd , t 7! f (t, , ↵) is an r.c.l.l. function, (12.4.23)

and g is related to f via

g(t, , ↵) = f (t , , ↵) (12.4.24)
and G is an Rr -valued r.c.l.l. adapted process and X is a semimartingale. Suppose
f is measurable w.r.t. B([0, 1)) ⌦ B(Dr ) ⌦ B(Dd ). (12.4.25)
For t < 1, ↵ 2 Dd and 2 Dr , let ↵t (s) = ↵(t ^ s) and t (s) = (t ^ s) and we assume
that f satisfies
t
f (t, , ↵) = f (t, , ↵t ), 8 2 Dr , ↵ 2 Dd , 0  t < 1. (12.4.26)
We also assume that there exists a function C : [0, 1) ⇥ Dr 7! R measurable w.r.t.

B([0, 1)) ⌦ B(Dr ) such that 8 2 Dr , ↵, ↵1 , ↵2 2 Dd , 0  t  T
kf (t, , ↵)k  C(t, )( sup |↵(s)|) (12.4.27)
T
0s<t
kf (t, , ↵1 ) f (t, , ↵2 )k  C(t, )( sup |↵1 (s) ↵2 (s)|) (12.4.28)

0s<t
and for all 2 Dr ,
For n 1, we define
F
t ! C(t, ) is r.c.l.l. (12.4.29)
A
˜ (n) : Dd ⇥ Dr ⇥ Dm 7! D([0, 1), Rd )
as follows- for ⌘ 2 Dm , 2 Dr and ↵ 2 Dd (fixed) let t0 = 0 and let {tj : j 1} and

j
{↵ : j 1}, { j : j j
1}, {⇠ : j 1} be defined inductively as follows: (these are
R
themselves functions of n, (⌘, , ↵), which are fixed for now and we will suppress writing
these as a function) if tj = 1 then tj+1 = 1 and if tj < 1 then
D
↵ti = (⌘t ⌘ti + f (ti , , ⇠ i )(↵t ↵ti ))1[ti ,1) (t)

(12.4.30)
i
t = (f (t, , ⇠ i ) f (ti , ⇠ i ))1[ti ,1) (t)
ti+1 = inf{t > ti : |↵ti | 2 n

or |↵ti | 2 n
or k ti k 2 n
or k i
t k 2 n
}
and 8
<⇠ i for t < ti+1
t
⇠ti+1 =
:⇠ i + ↵ i for t ti+1 .
t ti+1
Thus, ⇠ i+1 is a function that has jumps at t1 , ..., ti+1 and is constant on the intervals
[0, t1 ), . . . , [tj , tj+1 ), . . . [ti , ti+1 ), [ti+1 , 1). Also ⇠ i and ⇠ i+1 agree on [0, ti+1 ) by definition.
We finally define
1
X
˜ (n) (⌘, , ↵)(t) = ⌘t + f (t ^ ti , , ⇠ i )(↵t^ti+1 ↵t^ti ) (12.4.31)
i=0
and for for ⌘ 2 Dd , 2 Dr and ↵ 2 Dm we define

8
<lim ˜ (n) (⌘, , ↵) if the limit exists in ucc topology
n
˜ (⌘, , ↵) = (12.4.32)
:0 otherwise.
As in sections 6.2 and 12.3, it should be noted that the mapping
˜ : Dd ⇥ Dr ⇥ Dm 7! D([0, 1), Rd )
has been defined without any reference to a probability measure or any semimartingale.
T
As in Theorem 12.9, this also yields a pathwise formula. This one is preferable from
computation point of view as here, in order to construct nth approximation, we do not
need the (n 1)th approximation.
F
Theorem 12.13. Let f, g satisfy conditions (12.4.23)-(12.4.29). Let Y be a semimartingale
w.r.t. a filtration (F⇧ ) and let H, G be r.c.l.l. (F⇧ ) adapted processes taking values in Rd ,
Rr respectively. Let ˜ be as defined in (12.4.32) and let
A
X̃ = ˜ (H, G, Y ).
Then X satisfies the SDE

R
Z t
X̃t = Ht + g(t, G, X̃)dY. (12.4.33)
0+
The proof follows from observing that

D
a(t, !, ↵) = f (t, G(!), ↵), b(t, !, ↵) = g(t, G(!), ↵)
satisfy (12.3.2)-(12.3.8) and further,
˜ (n) (H, G, Y ) = X n
where X n is the 2 n approximation constructed in this section earlier. It now follows that
˜ (H, G, Y ) = X̃
is the unique solution to the equation (12.4.33).

12.5 Matrix-valued Semimartingales

In this section, we will consider matrix valued r.c.l.l. semimartingles. We will use the
notations introduced in Section 7.5. Recall that L(m, k) is the set of all m ⇥ k matrices
and L0 (d) denotes the set of non-singular d ⇥ d matrices.
Recall that when X = (X pq ) be an L(m, k)-valued semimartingale and f = (f ij ) is an
R
L(d, m)-valued predictable process such that f ij 2 L(X jq (for all i, j, q), then Y = f dX
is defined as an L(d, k)-valued semimartingale as follows: Y = (Y iq ) where
m Z
X
Y iq = f ij dX jq
j=1
and that for L(d, d)-valued semimartingales X, Y let [X, Y ] = ([X, Y ]ij ) be the L(d, d)-
valued process defined by
T
d
X
[X, Y ]ij
t = [X ik , Y kj ].
k=1
We can consider an analogue of the SDE (12.2.1)

F
dUt = b(t, ·, U )dYt , t 0, U0 = ⇠0 (12.5.1)
where now Y is an L(m, k)-valued continuous semimartingale, U is an L(d, k)-valued pro-

A
cess, ⇠0 is L(d, k)-valued random variable and here
b : [0, 1) ⇥ ⌦ ⇥ D[0, 1), L(d, k)) ! L(d, m).

R
Exercise 12.14. Formulate and prove analogues of Theorem 12.6, Theorem 12.8 and The-
orem 12.13 for the equation (12.5.1).
Exercise 12.15. Let X be an L(d, d)-valued semimartingale with X(0) = 0 and let I denote
D
the d ⇥ d identity matrix. Show that the equations

Z t
Yt = I + Ys dXs (12.5.2)
0
and Z t
Zt = I + (dXs )Zs (12.5.3)
0
admit unique solutions.
The solutions Y, Z are denoted respectively by e(X) and e0 (X) and are the left and
right exponentials of X.
Exercise 12.16. Let X be an L(d, d)-valued semimartingale with X(0) = 0 and let Y = e(X)
and Z = e0 (X). Show that
(i) If Y and Y are L0 (d)-valued then (I + X) is L0 (d)-valued.
(ii) If Z and Z are L0 (d)-valued then (I + X) is L0 (d)-valued.
For a matrix A 2 L(d, d) we will denote (only in this section) the Hilbert-Schmidt norm
of A by kAk. The following facts are standard. The norm is defined as
d
X
2
kAk = (aij )2 .
i,j=1
If kAk < 1 then B = (I + A) belongs to L0 (d). Further, for kAk  ↵ < 1, one has
1 1
kAk2 .
T
k(I + A) I + Ak  (12.5.4)
1 ↵
Exercise 12.17. For an L(d, d)-valued semimartingale X, show that
X
k( X)s k2  T race([X, X]t ).
0<st F
Exercise 12.18. Let X be an L(d, d)-valued semimartingale with X(0) = 0 such that (I +
A
X) is L0 (d)-valued. Then
P 1}
(i) Show that Wt = 0<st [{(I + X) I + ( X) + ( X)2 ] is well defined.
1} ( X)2 .
R
(ii) Show that W = {(I + X) I + ( X)
(iii) Let U = X + [X, X] + W . Show that
X + U + [X, U ] = 0 (12.5.5)
D
(iv) Show that

e(X)e0 (U ) = I (12.5.6)
and
e(U )e0 (X) = I. (12.5.7)
(v) Let Y = e(X) and Z = e0 (X). Show that Y , Y , Z and Z are L0 (d)-valued.
Hint: For (i), separate jumps bigger than half- these are finitely many. For the rest of the
jumps, use estimate (12.5.4). For (iv) use Integration by parts formula, (7.5.1).
For a L(d, d)-valued semimartingale Y such that Y0 = I and such that Y and Y are
L0 (d)-valued, let
Z t
log(Y )t = (Y ) 1 dY
0+
and Z t
0 1
log (Y ) = (dY )(Y ) .
0+
The next exercise is to show that e and log are inverses of each other. We will say that a
matrix valued process is a local martingale (or a process with finite variation) if each of its
components is so.
Exercise 12.19. Let X be an L(d, d)-valued semimartingale with X(0) = 0 such that (I +
X) is L0 (d)-valued and let Y be a L(d, d)-valued semimartingale such that Y and Y are
L0 (d)-valued. Then show that
T
(i) e(log(Y )) = Y, e0 (log0 (Y )) = Y.
(ii) log(e(X)) = X, log0 (e0 (X)) = X.
(iii) X 2 Mloc if and only if e(X) 2 Mloc .
(iv) X 2 V if and only if e(X) 2 V.

F
A
(v) Y 2 Mloc if and only if log(Y ) 2 Mloc .
(vi) Y 2 V if and only if log0 (Y ) 2 V.

R
Exercise 12.20. Let X i be L(d, d)-valued semimartingale with X i (0) = 0 such that (I +
R
X i ) is L0 (d)-valued, for i = 1, 2. Let Y = e(X 2 ) and U 1 = Y (dX 1 )(Y ) 1 . Then show
D
that
e(X 1 + X 2 + [X 1 , X 2 ]) = e(U 1 )e(X 2 ) (12.5.8)
The formula (12.5.8) has an important consequence. Given a L(d, d)-valued semi-
martingale Y such that Y and Y are L0 (d)-valued, let X = e(Y ). If we can write
X = M + A + [M, A] such that M 2 Mloc and A 2 V with (I + M ), (I + M ) are
L0 (d)-valued then it would follow that
Y = NB
where N = e(M ) 2 Mloc and B = e(A) 2 V yielding a mutiplicative decomposition of Y .
The next exercise is about this.
Exercise 12.21. Let Y be a L(d, d)-valued semimartingale such that Y0 = I with Y and Y
being L0 (d)-valued. Let X = e(Y ). Let
X
Dt = ( X)s 1{k( X)s k 1 }
3
0<st
Z t = Xt Dt .
(i) Show that

1
(a) P(k( Z)t k  3 8t) = 1.
(b) Z is locally integrable (i.e. each component is locally integrable.
(ii) Let Z = M + A be the decomposition with M 2 Mloc and A 2 V, Z0 = 0 and A being

predictable. Show that
T
1
(a) P(k( A)t k  3 8t) = 1.
2
(b) P(k( M )t k  3 8t) = 1.
(c) (I + M ) is L0 (d)-valued.
(iii) Let Bt = At + Dt so that X = M + B. Let Ct = Bt

Show that
F P
0st (I + ( M )s ) 1( B)s .
A
(a) B = C + [M, C].
(b) Xt = Mt + Ct + [M, C]t .
R
(c) (I + X) = (I + M )(I + C).

(d) (I + M ) and (I + C) are L0 (d)-valued.
R
D
Let H = e(C), N = H (dM )(H ) 1 and R = e(N ). Show that
(a) R 2 Mloc and H 2 V and

X = RH. (12.5.9)
Chapter 13
Girsanov Theorem
In this chapter, we will obtain Girsanov Theorem and its generalizations by Meyer. Let M
T
be a martingale on (⌦, F, P) and let Q be another probability measure on (⌦, F), absolutely
continuous w.r.t. P. Then as noted in Remark 4.15, M is a semimartingale on (⌦, F, Q).
We will obtain a decomposition of M into N and B, where N is a Q-martingale. This
F
result for Brownian motion was due to Girsanov and we are presenting the generalizations
due to Meyer.
A
13.1 Girsanov Theorem
Suppose Z is a (0, 1) valued r.c.l.l. uniformly integrable martingale with EP [Zt ] = 1. Let
⇠ be the limit of Zt (in L1 ) as t ! 1 and suppose that P(⇠ > 0) = 1. Let Q be the
R
probability measure on (⌦, F) defined by

Z
Q(A) = ⇠ dP.
A
D
Then Q is absolutely continuous w.r.t. P. If the underlying filtration is right continuous

(namely Ft = Ft+ ), then every absolutely continuous measure Q arises in this fashion.
Easy to see that if we denote by Pt and Qt the restrictions of P and Q to Ft+ , then
dQt
Zt = . (13.1.1)
dPt
For the rest of the section, we fix Z, Q as above. Let Yt = (Zt ) 1 . Then Y also an
r.c.l.l. process. Here is an important but simple observation.
Lemma 13.1. Let M be an adapted process. Then
(i) M is a Q-martingale if and only if M Z is a P-martingale.
393
394 Chapter 13. Girsanov Theorem
(ii) M is a Q-local martingale if and only if M Z is a P-local martingale.
For a stop time , let ⌘ be a non-negative F measurable random variable. Then
EQ [⌘] = EP [⌘Z] = EP [⌘E[Z | F ] = EP [⌘Z ].
Thus Ms is Q integrable if and only if Ms Zs is P-integrable. Further, for any stop time ,
EQ [M ] = EP [M Z ]. (13.1.2)
Thus (i) follows from Theorem 2.55. For (ii), if M is a Q-local martingale, then get stop
times ⌧n " 1 such that for each n, Mt^⌧n is a Q-martingale. Then we have
EQ [M ^⌧n ] = EP [M ^⌧n Z ^⌧n ]. (13.1.3)
Thus Mt^⌧n Zt^⌧n is a P-martingale and thus M Z is a P- local martingale. The converse
T
follows similarly.
The following result is due to Meyer building upon the idea by Girsanov in the context
of a Wiener process.
N t = Mt (Zs ) 1 d[M, Z]s

F
Theorem 13.2. (Girsanov-Meyer) Let M be a P-local martingale. Then
Z t
(13.1.4)
A
0
is a Q-local martingale.
Rt 1 d[M, Z].
Proof. We will show that N Z is a P- local martingale. Let Ut = 0 (Zs ) Then
R
N t Z t = Mt Z t Ut Zt
Z t Z t
= (Mt Zt [M, Z]t ) + [M, Z]t ( Us dZs + Zs dUs + [U, Z]t )
0 0
D
where we have used integration by parts formula, (4.6.7) along with U0 = 0. Now
Rt
(Mt Zt [M, Z]t ) is P-local martingale (see Theorem 9.27). Further, 0 Us dZs is a P-
local martingale (see Corollary 9.14). It thus follows that
Z t
Nt Zt = Lt + [M, Z]t Zs dUs [U, Z]t (13.1.5)
0
Rt
where Lt = (Mt Zt [M, Z]t ) 0 Us dZs and thus L is a P- local martingale. Since U 2 V
P
is a process with finite variation paths, [U, Z]t = 0<st ( U )s ( Z)s and as a consequence
Z t Z t
Zs dUs + [U, Z]t = Zs dUs . (13.1.6)
0 0
13.1. Girsanov Theorem 395
From the definition of U , it follows that

Z t Z t
1
Zs dUs = Zs (Zs ) d[M, Z] = [M, Z]. (13.1.7)
0 0
Thus using (13.1.5), (13.1.6) and (13.1.7) it follows that
Nt Zt = Lt
and thus N Z is a P-local martingale. Hence N is a Q-local martingale.
Here is the predictable version of the Girsanov-Meyer formula,
Theorem 13.3. (Girsanov-Meyer) Let M be a P-local martingale. Further suppose that

M Z is locally integrable. Then
Z t
L t = Mt (Zs ) 1 dhM, Zis (13.1.8)
T
0
is a Q-local martingale.
Proof. Once again we need to show that LZ is a P-local martingale. We have observed
Nt = hM, Zit Zt
Z t
F
that (see Remark 9.31), Mt Zt hM, Zit is a local martingale. So in order to show that LZ
is a P- local martingale, it suffices to show that N defined by
(Zs ) 1 dhM, Zis (13.1.9)

A
0
Rt 1 dhM, Zi
is a P-local martingale. Let Vt = 0 (Zs ) s . First we observe that V has a jump
at a stop time if and only if hM, Zi has a jump at sigma and then
R
1
( V ) = (Z ) ( hM, Zi) .
Thus predictability of hM, Zi and the fact that for a predictable stop time , Z is F
measurable, it follows using Lemma 8.24 that V is predictable. Then we have (note V0 = 0)
D
Z t Z t
Z t Vt = Zs dVs + Vs dZs + [V, Z]t . (13.1.10)
0 0
Rt
Since 0 Zs dVs = hM, Zit , we conclude
Z t
Nt = Vs dZs + [V, Z]t .
0
Rt
Now 0 Vs dZs is a P-local martingale by Corollary 9.14 and [V, Z]t is a P-local martingale
by Theorem 9.29. Thus N is a P-local martingale. As noted earlier, this completes the
proof that L is Q-local martingale.
396 Chapter 13. Girsanov Theorem
T
F
A
R
D
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T
F
A
R
D
Index
B(Rd ), 7 P, 91
bp
B(E), 40 !, 61
B(⌦, F), 7 R0 , 95
C(E), 40 Rd , 7
T
C(Rd ) , 7 S, 91, 95
Cb (Rd ), 7 S1 , 101
Dd , 41 (A), 7
dem , 145
↵, 41
F ( , ⌧ ], [ , ⌧ ], 245
[⌧ ], 245
ucp
!, 62
A
ducp , 62
X, 43 V,V0 , V+ , V+ 0 , 67
em
!, 145 Var[a,b] , 66
v
X ! Y , 42
R
(F⇧ ), 45
(F⇧+ ), 45 W, 258
kf kp , 8 X⌧ , 51
X , 43
F⌧ , 51
D
X (c) , 193, 289

F⌧ , 242
X [ ] , 112
JX , 95
[X, Y ](c) , 143, 289
j(X, Y ), 122
e 91
⌦,
L(X), 99
arbitrage opportunity, 343
Lp , 8
Lv (X 1 , . . . , X d ), 327 Bichteler-Dellacherie-Meyer-Mokobodzky
M, Mloc , Mc , Mc,loc , 161 Theorem, 192, 205
M2 , M2loc , 161 bp-closed , 61
Md , M2d , Md,loc , M2d,loc , 195 Brownian motion, 43
403
404 INDEX
Ito integral w.r.t. , 80 predictable

Levy’s characterisation of, 72 -Field, 91
quadratic variation of, 69 process, 92
Burkholder’s inequality, 31 sequence, 16
Burkholder-Davis-Gundy inequality, 34, stop time, 246
296 process, 13, 42
adapted, 13, 45
compensator, 191, 271
continuous, 43
conditional expectation, 10
locally bounded, 110
di↵usion process, 85 locally integrable, 190
dominated convergence theorem, 104 locally square integrable, 190
dominating process, 354 predictable, 92
T
Doob’s maximal inequality, 20, 48 r.c.l.l., 43
Doob’s upcrossings inequality, 24
quadratic variation
Emery topology, 145 of stochastic integrator, 119
filtration, 13, 45
independent, 11
F of Brownian motion, 69
of square integrable martingales, 165
of stochastic integrator, 120
A
integration by parts formula, 121
Ito’s formula, 133, 136, 138 semimartingale, 161
stochastic integrator, 95
l.c.r.l. process, 43
R
quadratic variation, 119

local martingale, 160 weak, 198
martingale, 14, 46 stochastic process, 13
stop time, 18, 49
D
continuous time, 46
convergence theorem, 25 contact time, 50
discrete time, 14 discrete, 18
locally square integrable, 161 hitting time, 50
square integrable, 160 predictable, 246
submartingale, 14, 46
No Arbitrage,NA, 343
trading strategies, 343
pathwise formula, 210
admissible, 343
for stochastic integral, 211
Poisson process, 44 ucc topology, 40

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1

Introduction to Stochastic Calculus

Chennai Mathematical Institute

Version dated 30 May 2017.

1 Discrete Parameter Martingales 7

2 Continuous Time Processes 40

2.1 Notations and Basic Facts . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40

2.4 A Version of Monotone Class Theorem . . . . . . . . . . . . . . . . . . . . . 59

3 The Ito Integral 69

5.9 Enlargement of Filtration . . . . . . . . . . . . . . . . . . . . . . . . . . . . 206

6 Pathwise Formula for the Stochastic Integral 210

6.1 Preliminaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 210

7 Continuous Semimartingales 216

8 Predictable Increasing Processes 242

9 The Davis Inequality 291

10 Integral Representation of Martingales 308

10.7 Connections to Mathematical Finance . . . . . . . . . . . . . . . . . . . . . 342

11 Dominating Process of a Semimartingale 347

11.1 An optimization result . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 348

12 SDE driven by r.c.l.l. Semimartingales 367

12.5 Matrix-valued Semimartingales . . . . . . . . . . . . . . . . . . . . . . . . . 389

13 Girsanov Theorem 393

Discrete Parameter Martingales

(Cb (Rd )) = B(Rd ).

An Rd -valued random variable X (on a probability space (⌦, F, P)) is a measurable

denote the integral Z

It is well known that Lp (µ) is a Banach space under the norm kf kp .

1.2 Conditional Expectation

E[(X F a)2 ] (1.2.1)

E[(X g(Y ))2 ]

E[(X g(Y ))2 ]  E[(X f (Y ))2 ] (1.2.2)

K = {f (Y ) : f from R to R measurable, E[(f (Y ))2 ] < 1}

is a closed subspace of A. Hence given X 2 A, there is a unique element in K, namely

g(Y ) to be the conditional expectation of X given Y , written as E[X | Y ] = g(Y ). One

Note that (1.2.2) implies that for all t

where g is a Borel function satisfying

E[X 1A ] = E[Z 1A ], 8A 2 G. (1.2.5)

Proposition 1.2. Let X, Z be integrable random variables on (⌦, F, P) and G, H be sub-

(i) E[aX + bZ | G] = aE[X | G] + bE[Z | G].

(ii) X  Z ) E[X | G]  E[Z | G].

(iii) |E[X | G]|  E[|X| | G].

(iv) E[E[X | G]] = E[X].

(v) E[E[X | H] | G] = E[X | G].

(vi) If Z is G measurable such that E[ |ZX| ] < 1 then

Of course when X is square integrable, we do have an analogue of (1.2.2):

A sequence {Xn } of random variables is said to be a sequence of independent random

variables if X1 , X2 , . . . , Xm are independent for every m 1.

Exercise 1.4. Let X, Y be real valued random variables. Show that

(iii) X, Y are independent if and only if for all t 2 R, one has

E[exp{itX} | (Y )] = E[exp{itX}]. (1.3.3)

E[exp{i · U } | G] = E[exp{i · U }]. (1.3.4)

[30] for more on filtering theory.

Definition 1.6. A filtration on a probability space (⌦, F, P) is an increasing family of sub

Sometimes, a filtration is treated as a mere technicality. We would like to stress that

Definition 1.8. A sequence M = {Mn } of random variables is said to be a martingale if

Definition 1.9. A sequence M = {Mn } of random variables is said to be a submartingale

for all n. If M is a submartingale and is an increasing convex function then X is also

Theorem 1.10. Let M m be a sequence of martingales on some probability space (⌦, F, P)

E[|E[X m | G] E[X | G]| ] = E[|E[(X m X) | G]| ]

But Mnm ! Mn in L1 (P) so that E[Mn+1 | Fn ] = Mn . It follows that M is a martingale.

Then A is an increasing process (i.e. An  An+1 for n 0 ) such that A0 = 0, An is Fn 1

is a martingale. Further, if B = {Bn } is a process such that B0 = 0, Bn is Fn 1 measurable

for each n and N = {Nn } defined by Nn = Xn Bn is a martingale, then

Proof. Since X is a submartingale, each summand in the definition of An is non-negative