A note on chaotic and predictable representations for Itô-Markov additive processes

DOI10.1080/07362994.2018.1434417zbMATH Open1401.60145arXiv1612.09216OpenAlexW2963882605MaRDI QIDQ4685693FDOQ4685693

Zbigniew Palmowski, Łukasz Stettner, Anna Sulima

Publication date: 9 October 2018

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

Abstract: IIn this paper we provide predictable and chaotic representations for It^{o}-Markov additive processes $X$. Such a process is governed by a finite-state CTMC $J$ which allows one to modify the parameters of the It^{o}-jump process (in so-called regime switching manner). In addition, the transition of $J$ triggers the jump of $X$ distributed depending on the states of $J$ just prior to the transition. This family of processes includes Markov modulated It^{o}-L'evy processes and Markov additive processes. The derived chaotic representation of a square-integrable random variable is given as a sum of stochastic integrals with respect to some explicitly constructed orthogonal martingales. We identify the predictable representation of a square-integrable martingale as a sum of stochastic integrals of predictable processes with respect to Brownian motion and power-jumps martingales related to all the jumps appearing in the model. This result generalizes the seminal result of Jacod-Yor and is of importance in financial mathematics. The derived representation then allows one to enlarge the incomplete market by a series of power-jump assets and to price all market-derivatives.

Full work available at URL: https://arxiv.org/abs/1612.09216

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zbMATH Keywords

regime switchingBrownian motionmartingale representationorthogonal polynomialsMarkov additive processesstochastic integralcomplete marketpower-jump process

Mathematics Subject Classification ID

Stochastic integrals (60H05) Continuous-time Markov processes on discrete state spaces (60J27)

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Cited In (2)

• On moments of integrals with respect to Markov additive processes and of Markov modulated generalized Ornstein-Uhlenbeck processes
• Additive \(N\)-step Markov chains as prototype model of symbolic stochastic dynamical systems with long-range correlations

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