Conic martingales from stochastic integrals

DOI10.1111/MAFI.12147MaRDI QIDQ4642730zbMATH OpenOpenAlexFDO

Authors Frédéric Vrins, Monique Jeanblanc

Publication date 25 May 2018

Published in Mathematical Finance (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/1603.07488

zbMATH Keywords

bounded martingalediffusion processstochastic differential equationstochastic survival probability

Mathematics Subject Classification ID

Martingales with continuous parameter (60G44) Stochastic ordinary differential equations (aspects of stochastic analysis) (60H10)

Abstract: In this paper we introduce the concept of conic martingales}. This class refers to stochastic processes having the martingale property, but that evolve within given (possibly time-dependent) boundaries. We first review some results about the martingale property of solution to driftless stochastic differential equations. We then provide a simple way to construct and handle such processes. Specific attention is paid to martingales in $[0,1]$. One of these martingales proves to be analytically tractable. It is shown that up to shifting and rescaling constants, it is the only martingale (with the trivial constant, Brownian motion and Geometric Brownian motion) having a separable coefficient $sigma(t,y)=g(t)h(y)$ and that can be obtained via a time-homogeneous mapping of Gaussian diffusions. The approach is exemplified to the modeling of stochastic conditional survival probabilities in the univariate (both conditional and unconditional to survival) and bivariate cases.

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