On the lack of semimartingale property

Abstract: In this work we extend the characterization of semimartingale functions in Cinlar et al. (1980) to the non-Markovian setting. We prove that if a function of a semimartingale remains a semimartingale, then under certain conditions the function must have intervals where it is a difference of two convex functions. Under suitable conditions this property also holds for random functions. As an application, we prove that the median process defined in Prokaj et al. (2011) is not a semimartingale. The same process appears also in Hu and Warren (2000) where the question of the semimartingale property is raised but not settled.

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The authors extend the characterization of semimartingale functions due to \textit{E. Cinlar} et al. [Z. Wahrscheinlichkeitstheor. Verw. Geb. 54, 161--219 (1980; Zbl 0443.60074)] to the non-Markovian setting. They show that if a function of a semimartingale remains a semimartingale, then under certain conditions the function must have intervals where it is a difference of two convex functions. Under suitable conditions this property also holds for random functions. As an application, they prove that the median process defined by \textit{V. Prokaj} et al. [Ann. Inst. Henri Poincaré, Probab. Stat. 47, No. 2, 498--514 (2011; Zbl 1216.60048)] is not a semimartingale. This is defined as follows. Let \((D_t(x))_{t\geq 0}\) be the solution of \(d D_t(x) = \sigma(D_t(x))dB_t\), \(D_0(x)=x\in[0,1]\), where \(\sigma(x)=x\wedge(1-x)\). The median process is \((D^{-1}_t(1/2))_{t\geq 0}\). More generally, they show that \((D^{-1}_t (\alpha))_{t\geq 0}\) is not a semimartingale for \(\alpha\in(0, 1)\).

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