Integral representation of martingales motivated by the problem of endogenous completeness in financial economics

DOI10.1016/J.SPA.2013.06.017zbMATH Open1301.60058arXiv1110.3248OpenAlexW2081640675MaRDI QIDQ2434474FDOQ2434474

Dmitry Kramkov, Silviu Predoiu

Publication date: 6 February 2014

Published in: Stochastic Processes and their Applications (Search for Journal in Brave)

Abstract: Let $mathbbQ$ and $mathbbP$ be equivalent probability measures and let $psi$ be a $J$-dimensional vector of random variables such that $fracdmathbbQdmathbbP$ and $psi$ are defined in terms of a weak solution $X$ to a $d$-dimensional stochastic differential equation. Motivated by the problem of emph{endogenous completeness} in financial economics we present conditions which guarantee that every local martingale under $mathbbQ$ is a stochastic integral with respect to the $J$-dimensional martingale $S_{t}setmathbb{E}^{mathbbQ}[psi|mathcal{F}_t]$. While the drift $b=b(t,x)$ and the volatility $sigma=sigma(t,x)$ coefficients for $X$ need to have only minimal regularity properties with respect to $x$, they are assumed to be analytic functions with respect to $t$. We provide a counter-example showing that this $t$-analyticity assumption for $sigma$ cannot be removed.

Full work available at URL: https://arxiv.org/abs/1110.3248

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zbMATH Keywords

martingalesdiffusionanalytic semigroupsequilibriumparabolic equationsintegral representationreal analytic functionsdynamic completeness[https://portal.mardi4nfdi.de/w/index.php?title=+Special%3ASearch&search=Krylov-It%EF%BF%BD%EF%BF%BD+formula&go=Go Krylov-It�� formula]

Mathematics Subject Classification ID

Initial value problems for second-order parabolic equations (35K15) Abstract parabolic equations (35K90) Martingales with continuous parameter (60G44) Dynamic stochastic general equilibrium theory (91B51)

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Cited In (11)

• The completeness and incompleteness of financial markets in economies driven by diffusion processes
• Density of the set of probability measures with the martingale representation property
• Existence of financial equilibria in continuous time with potentially complete markets
• Complete and incomplete financial markets in multi-good economies
• The Role of (Quasi) Analyticity in Establishing Completeness of Financial Markets Equilibria
• Duesenberry Equilibrium and Heterogenous Agents
• Existence of an endogenously complete equilibrium driven by a diffusion
• Title not available (Why is that?)
• Market completion with derivative securities
• Dynamic equilibrium with insider information and general uninformed agent utility
• Existence of an equilibrium with limited participation

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