Itô-Skorohod stochastic equations and applications to finance (Q1773288): Difference between revisions

The author considers stochastic differential equations of the form \[ X_t = Z + \int_0^t \sigma (s,E[X_s| {\mathcal F}_{[s,t]^c}]) dW_s + \int_0^t b(s,X_s) ds , \] where \((W_u)_{u\in {\mathbb R}_+}\) is a standard Brownian motion, \({\mathcal F}_{[s,t]^c}\) is the \(\sigma\)-field generated by the increments of \((W_u)_{u\in {\mathbb R}_+}\) outside the interval \([s,t]\), \(Z\) is a possibly anticipating initial condition, and the stochastic integral with respect to \((W_u)_{u\in {\mathbb R}_+}\) is taken in the (adapted) Itô sense. Using such equations he constructs an anticipating Black-Scholes type model for which he provides pricing and hedging formulas when the initial value of the risky asset is \(S_0 = c+W_1\), \(c\in {\mathbb R}\).