Filtration shrinkage, strict local martingales and the Föllmer measure (Q2511563)

The author studies the projections of local martingales onto subfiltrations. The main goal of the paper is to shed further light on when the optional projection of a general positive local martingale \(N\) fails to be a local martingale and, when this is the case, what can be said about the behavior of its finite variation part. The basic structural result holds for arbitrary positive local martingales, subject only to a weak regularity conditions on the filtration. A crucial tool in the analysis is a variant of the Föllmer measure \(Q_0\) associated with \(N\). A nonuniqueness property of (this variant of) the Föllmer measure leads to formulate an equivalent measure extension problem: find an extension \(Q\) of \(Q_0\) that is equivalent to starting measure \(P\) on each \(\sigma\)-field of the subfiltration under consideration. When a solution exists, one can interpret the finite variation part of the projection of \(N\) as the compensator of a certain stopping time. This stopping time is proved to be the explosion time of \(N\), which may be finite under the Föllmer measure. Then the author studies the filtrations generated by the image under some continuous map of the coordinate process \(Y\) and takes \(N\) to be a deterministic function of \(Y\). At last, the coordinate process is assumed to be a multidimensional Brownian motion, and in this framework the explicit conditions are derived under which the equivalent measure extension problem can be solved.