# Local martingale

Jump to navigation Jump to search

In mathematics, a local martingale is a type of stochastic process, satisfying the localized version of the martingale property. Every martingale is a local martingale; every bounded local martingale is a martingale; in particular, every local martingale that is bounded from below is a supermartingale, and every local martingale that is bounded from above is a submartingale; however, in general a local martingale is not a martingale, because its expectation can be distorted by large values of small probability. In particular, a driftless diffusion process is a local martingale, but not necessarily a martingale.

Local martingales are essential in stochastic analysis, see Itō calculus, semimartingale, Girsanov theorem.

## Definition

Let (Ω, FP) be a probability space; let F = { Ft | t ≥ 0 } be a filtration of F; let X : [0, +∞) × Ω → S be an F-adapted stochastic process on set S. Then X is called an F-local martingale if there exists a sequence of F-stopping times τk : Ω → [0, +∞) such that

$X_{t}^{\tau _{k}}:=X_{\min\{t,\tau _{k}\}}$ is an F-martingale for every k.

## Examples

### Example 1

Let Wt be the Wiener process and T = min{ t : Wt = −1 } the time of first hit of −1. The stopped process Wmin{ tT } is a martingale; its expectation is 0 at all times, nevertheless its limit (as t → ∞) is equal to −1 almost surely (a kind of gambler's ruin). A time change leads to a process

$\displaystyle X_{t}={\begin{cases}W_{\min({\tfrac {t}{1-t}},T)}&{\text{for }}0\leq t<1,\\-1&{\text{for }}1\leq t<\infty .\end{cases}}$ The process $X_{t}$ is continuous almost surely; nevertheless, its expectation is discontinuous,

$\displaystyle \mathbb {E} X_{t}={\begin{cases}0&{\text{for }}0\leq t<1,\\-1&{\text{for }}1\leq t<\infty .\end{cases}}$ This process is not a martingale. However, it is a local martingale. A localizing sequence may be chosen as $\tau _{k}=\min\{t:X_{t}=k\}$ if there is such t, otherwise τk = k. This sequence diverges almost surely, since τk = k for all k large enough (namely, for all k that exceed the maximal value of the process X). The process stopped at τk is a martingale.[details 1]

### Example 2

Let Wt be the Wiener process and ƒ a measurable function such that $\mathbb {E} |f(W_{1})|<\infty .$ Then the following process is a martingale:

$\displaystyle X_{t}=\mathbb {E} (f(W_{1})|F_{t})={\begin{cases}f_{1-t}(W_{t})&{\text{for }}0\leq t<1,\\f(W_{1})&{\text{for }}1\leq t<\infty ;\end{cases}}$ here

$\displaystyle f_{s}(x)=\mathbb {E} f(x+W_{s})=\int f(x+y){\frac {1}{\sqrt {2\pi s}}}\mathrm {e} ^{-y^{2}/(2s)}.$ $\displaystyle Y_{t}={\begin{cases}\delta _{1-t}(W_{t})&{\text{for }}0\leq t<1,\\0&{\text{for }}1\leq t<\infty ,\end{cases}}$ where

$\displaystyle \delta _{s}(x)={\frac {1}{\sqrt {2\pi s}}}\mathrm {e} ^{-x^{2}/(2s)}.$ The process $Y_{t}$ is continuous almost surely (since $W_{1}\neq 0$ almost surely), nevertheless, its expectation is discontinuous,

$\displaystyle \mathbb {E} Y_{t}={\begin{cases}1/{\sqrt {2\pi }}&{\text{for }}0\leq t<1,\\0&{\text{for }}1\leq t<\infty .\end{cases}}$ This process is not a martingale. However, it is a local martingale. A localizing sequence may be chosen as $\tau _{k}=\min\{t:Y_{t}=k\}.$ ### Example 3

$\displaystyle X_{t}=\ln |Z_{t}-1|\,.$ The process $X_{t}$ is continuous almost surely (since $Z_{t}$ does not hit 1, almost surely), and is a local martingale, since the function $u\mapsto \ln |u-1|$ is harmonic (on the complex plane without the point 1). A localizing sequence may be chosen as $\tau _{k}=\min\{t:X_{t}=-k\}.$ Nevertheless, the expectation of this process is non-constant; moreover,

$\displaystyle \mathbb {E} X_{t}\to \infty$ as $t\to \infty ,$ ## Martingales via local martingales

$\textstyle (*)\quad \mathbb {E} \sup _{k}|M_{t}^{\tau _{k}}|<\infty$ for every t.

Thus, Condition (*) is sufficient for a local martingale $M_{t}$ being a martingale. A stronger condition

$\textstyle (**)\quad \mathbb {E} \sup _{s\in [0,t]}|M_{s}|<\infty$ for every t

is also sufficient.

Caution. The weaker condition

$\textstyle \sup _{s\in [0,t]}\mathbb {E} |M_{s}|<\infty$ for every t

is not sufficient. Moreover, the condition

$\textstyle \sup _{t\in [0,\infty )}\mathbb {E} \mathrm {e} ^{|M_{t}|}<\infty$ is still not sufficient; for a counterexample see Example 3 above.

A special case:

$\textstyle M_{t}=f(t,W_{t}),$ ${\Big (}{\frac {\partial }{\partial t}}+{\frac {1}{2}}{\frac {\partial ^{2}}{\partial x^{2}}}{\Big )}f(t,x)=0.$ However, this PDE itself does not ensure that $M_{t}$ is a martingale. In order to apply (**) the following condition on f is sufficient: for every $\varepsilon >0$ and t there exists $C=C(\varepsilon ,t)$ such that

$\textstyle |f(s,x)|\leq C\mathrm {e} ^{\varepsilon x^{2}}$ ## Technical details

1. For the times before 1 it is a martingale since a stopped Brownian motion is. After the instant 1 it is constant. It remains to check it at the instant 1. By the bounded convergence theorem the expectation at 1 is the limit of the expectation at (n-1)/n (as n tends to infinity), and the latter does not depend on n. The same argument applies to the conditional expectation.