This version December 8, 2012.The author has been supported by NSF grants and by the WisconsinAlumni Research Foundation.
This material is for a course on stochastic analysis at UW–Madison. The text covers the development of the stochastic integral of predictable processes with respect to cadlag semimartingale integrators,Itˆo’s formula in an open domain in
, an existence and uniquenesstheorem for an equation of the type
is a cadlag semimartingale, and local time and Girsanov’s theorem forBrownian motion. There is also a chapter on the integral with respectto the white noise martingale measure and solving the stochastic heatequation with multiplicative noise.The text is self-contained except for certain basics of integrationtheory and probability theory which are explained but not proved. Inaddition, the reader needs to accept without proof two basic martin-gale theorems: (i) the existence of quadratic variation for a cadlag localmartingale; and (ii) the so-called fundamental theorem of local martin-gales that states the following: given a cadlag local martingale
anda positive constant
can be decomposed as
are cadlag local martingales, jumps of
are bounded by
haspaths of bounded variation.This text intends to provide a stepping stone to deeper books suchas Karatzas-Shreve and Protter. The hope is that this material is acces-sible to students who do not have an ideal background in analysis andprobability theory, and useful for instructors who (like the author) arenot experts on stochastic analysis.