Exercises in stochastic analysis

Franco Flandoli, Mario Maurelli, Dario Trevisan

The exercises with a P are those which have been done (totally or partially) in the
previous lectures; the exercises with an N could be done (totally or partially) in the next
classes. Of course, this is a pre-selection, one more selection and changes are possible.

1 Laws and marginals

Exercise 1 (P). Let τ be a random variable (r.v.) with values in [0, +∞[, define the
(continuous-time) waiting process X as Xt = 1τ <t . Compute the m-dimensional distri-
butions of X, for any m integer.

Exercise 2 (P). Exhibit two processes, which are not equivalent but have the same 1- and
2-dimensional distributions. Exhibit a family of compatible 2-dimensional distribions,
which does not admit a process having those distributions as 2-dimensional marginals.

Exercise 3. Let (F, F) be a measurable space, G a subset (not necessarily measurable)

of F , define the restriction of F to G as F|G := {A ∩ G|A ∈ F}; it is easy to see that
F|G is a σ-algebra on G.
Now consider (E, E) a measurable space (morally, the state space for some continuous
process), call C = C([0, T ]; E). Show that B(C) = (E [0,T ] )|C . This allows to define the
law of a continuous process on C, directly from the definition of law for a generic process.

2 Trajectories and filtrations

Exercise 4. Let X be a continuous process. W Prove that its natural filtration (Ft )t (Ft =
σ(Xs |s ≤ t)) is left-continuous, that is Ft = s<t Fs .

Exercise 5. Let X, Y be two processes, a.e. continuous and modifications one of each
other. Show that they are indistinguishable.
Let X be a process, such that a.e. trajectory is continuous. Show that there exists a
process U , indistinguishable of X, which is everywhere continuous, i.e. every trajectory
is continuous.

Exercise
R t 6. Let X be a progressively measurable bounded process. Show that the process
(Yt = 0 Xs ds)t is progressively measurable (with respect to the same filtration).

1
Exercise 7. Let X, Y be two processes, modifications one of each other. Suppose that
X is adapted to a filtration F = (Ft )t and that F0 is completed, that is, contains all the
P -negligible sets. Prove that also Y is adapted to F.

Exercise 8 (P). Let X be a process, adapted to a filtration F. Fix t ≥ 0 and (tn )n

a sequence of non-negative times converging to t. Show that the r.v.’s lim supn Xtn
and lim inf n Xtn are measurable with respect to Ft+ = ∩s>t Fs ; in particular, the set
{∃ limn Xtn = Xn } is in Ft+ .
Is it true that the r.v. lim supr→t Xr is Ft+ -measurable? What if X is right-continuous
(or left-continuous)?

3 Gaussian r.v.’s
Exercise 9 (P). Let (Xn )n be a family of d-dimensional Gaussian r.v.’s, converging in
L2 to a r.v. X. Show that X is Gaussian and find its mean and convariance matrix. A
stronger result holds: the thesis remains true if the convergence is only in law (see Baldi
0.16). [Recall that Y is Gaussian with mean m and cocariance matrix A if and only if
its characteric function is Ŷ (ξ) = exp[im · ξ − 21 ξ · Aξ].]

Exercise 10. Let X be a Rd -valued non-degenerate Gaussian r.v., with mean m and
covariance matrix A. Find an expression for its moments.

4 Conditional expectation and conditional law

Exercise 11 (P). Prove the conditional versions of the following theorems: Fatou,
Lebesgue, Jensen.
Pn
Exercise 12. Let X1 , . . . Xn a family of i.i.d. r.v.’s, call S = k=1 Xk . Prove that
E[Xk |S] is independent of k and so is n1 S.

Exercise 13. Let X W be a r.v., G, H be two filtrations such that X is independent of H.

Is it true that E[X|G H] = E[X|G]?

Exercise 14 (P). Let X, Y be two r.v.’s with values in Rd . We know, from a mea-
surability theorem by Doob (see the notes and Baldi, Chapter 0), that, for every Borel
bounded function f on Rd , there exists a measurable function g = g f on Rd , such that
E[f (X)|Y ] = g(Y ) a.s.. Notice that the statement remains true if we change g outside
a negligible set with respect to the law of Y .
Prove that, for every f , g f depends only on the law of (X, Y ). Conversely, prove that
the law of (X, Y ) depends only on the law of Y and such a family (g f )f .

Exercise 15 (P). Here is an example where the g of the previous exercise (and so
the conditional expectiation) can be computed. Let X, Y be two r.v.’s with values in
Rd , suppose that (X, Y ) has an absolutely continuous law (with respect to the Lebesgue
measure), call ρY , ρX,Y the densities of the laws resp. of Y , (X, Y ) (which is the relation

2
between them?). Prove that, for every Borel bounded function f on Rd , a version of
E[f (X)|Y ] = g(Y ) is given by
Z
g(y) = f (x)h(x, y)dx, (1)
Rd
ρX,Y (x, y)
h(x, y) = 1ρY >0 (y). (2)
ρY (y)

Notice that the statement remains true if we change h outside the set {ρY > 0}.

Exercise 16. With the notation of the previous exercise, compute h when (X, Y ) is a
non-degenerate Gaussian r.v. with mean m and covariance matrix A.
Notice that, even if h is defined up to Y# P -negligible sets (and so up to Lebesgue-negligible
sets, since Y is Gaussian non-degenerate), the expression (2) gives the unique continuous
representative of h (we will call it h as well). Notice also that, for fixed y, h(·, y)
is a Gaussian density. For such h, we will denote the corresponding g f as g f (y) =
E[f (X)|Y = y].

5 Markov processes
Exercise 17. Show that the Markow property, with respect to the natural filtration,
depends only on the law of a process: if X is a Markov process (with respect to Ft =
σ(Xs |s ≤ t)) and Y has the same law of X, then Y is also Markov (with respect to
Gt = σ(Ys |s ≤ t)). Show also that, if p is a transition function for X, then p is a
transition function also for Y .

Exercise 18. Show that, if X is a Markov process with respect to a filtration F, then it
is Markov also with respect to a subfiltration G (such that X is adapted to G).

Exercise 19 (P). Let Sn be a symmetric random walk, call Mn = max0≤j≤n Sj . Show

that M is not a Markov process.

Exercise 20. Find a Markov process X, such that |X| is not Markov (with respect
to the same filtration of X or even the natural filtration of |X|). Can you guess a
sufficient condition, for example on the joint law of (Xs , |Xt |) (for s < t), which makes
|X| Markov?

Exercise 21 (P). Let X be a process with independent increments. Show that X is a

Markov process.

Exercise 22. Let X be a process with independent increments; call µ0 the law of X0 ,
µs,t the law of Xt − Xs , for s < t. Show that these laws determines uniquely the law of
X and that, for every s < r < t, it holds µs,t = µs,r ∗ µr,t , that is
Z Z Z
f (x + y)µs,r (dx)µs,r (dy) = f (z)µs,t (dz). (3)
Rd Rd Rd

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Conversely, let µ0 , µs,t , 0 ≤ s < t, be a family of probability measures on Rd such that,
for every s < r < t, it holds µs,t = µs,r ∗ µr,t . Show that there exists a process X such
that the law of X0 is µ0 and, for every s < t, the law of Xt − Xs is µs,t . Is there a
filtration which makes X a process with independent increments?

Exercise 23. Let X be a process with independent increments, with values in Rd . Sup-
pose that, for some s ≥ 0, Xs has a law which is absolutely continuous with respect to the
Lebesgue measure (resp. non atomic). Prove that, for every t ≥ s, Xt has an absolutely
continuous (resp. non atomic) law.

6 Brownian motion
Exercise 24. Show that a Brownian motion is unique in law.

Exercise 25 (P). Verify the scaling invariance of the Brownian motion: if W is a real
Brownian motion, with respect to a filtration F, then

1. for every r > 0, (Ws+r − Wr )t is a Brownian motion with respect to (Fs+r )s ;

2. −W is a Brownian motion with respect to (Fs )s ;

3. for every c > 0, ( √1c Wcs )s is a Brownian motion with respect to (Fcs )s ;

4. the process Z, defined as Z0 = 0, Zs = sW1/s for s > 0, is a Brownian motion

with respect to its natural completed filtration.

A remark on property 3: if we put s = t/c, 3 implies that W̃s := √1c Wt is a Brownian

motion; in other words, we can say that the space scales as the square root of the time,
in law. Think about the links between this and Hölder and no BV properties of the
trajectories.

Exercise 26 (P). Let W be a real Brownian motion. Show that, for a.e. trajectory,

Wt
lim = 0. (4)
t→0 t
Hint: use Exercise 25.

Exercise 27 (P). Let W be a real Brownian motion. For T > 0, ω in Ω, define the
random set ST (ω) = {t ∈ [0, T ]|Wt (ω) > 0}. Show that the law of the r.v.

L1 (ST )
(5)
T
is independent of T (L1 is the 1-dimensional Lebesgue measure). This law is in fact the
√
arcsine law: P (L1 (ST ) ≤ αT ) = π2 arcsin( α).

Exercise 28. Let W be a real Brownian motion. Prove the following facts:

4
 • For a.e. ω in Ω, the trajectory W (ω) is not monotone on any interval [a, b], with
a < b; in particular, there exists a dense set S in [0, +∞[ of local maximum points
for W (ω).
• For a.e. ω in Ω, the trajectory W (ω) assumes different maxima on every couple of
(non-trivial) compact disjoint intervals with rational extrema; in particular, every
local maximum for W (ω) is strict.
Exercise 29. Let W be a real Brownian motion. Prove that, if A is a negligible set of
Rd (with respect to L1 ), then, for a.e. ω, the random set C(ω) = {t ∈ [0, T ]|Wt (ω) ∈ A}
is negligible (again with respect to L1 ).
Exercise 30. Let W be a real Brownian motion. Show that, on every interval [0, δ],
δ > 0, W passes through 0 infinite times, with probability 1.
Exercise 31. A d-dimensional Brownian motion, with respect to a filtration F = (Ft )t ,
is a process B, adapted to F, with values in Rd , such that:
• B0 = 0 a.s.;
• B has independent increments (with respect to the filtration F);
• for every s < t, the law of Bt − Bs is centered Gaussian with covariance matrix
(t − s)Id (Id is the d × d identity matrix);
• B has continuous trajectories.
In case F is the natural completed filtration of B, we call B a standard Brownian motion.
Show that a d-dimensional process X is a standard Brownian motion if and only if its
components Xj ’s are real independent standard Brownian motions.
Exercise 32. Let W a real Brownian motion. Prove that, for every T > 0, α < 1/2,
there exists c > 0 such that the event {Wt ≤ ctα , ∀t ∈ [0, T ]} occurs with positive
probability.
Hint: prove first than, for any fixed c, there exists a (small) T > 0, depending only on
c, α and the law of W , such that the above event is not negligible.

7 Stopping times
Exercise 33 (P). Let X be a continuous process, with values in a metric space E,
adapted to a right-continuous completed filtration F; let G, F be an open, resp. closed
set in E. Define τG = inf{t ≥ 0|Xt ∈ / G}, ρF = inf{t ≥ 0|Xt ∈ F }; notice that ρF = τF c .
Prove that τG , ρF are stopping times with respect to F.
Show that the laws of τG and of ρF depend only on the law of X. Prove also that the
laws of (τG , X) and (ρF , X), as r.v.’s with values in [0, +∞] × C([0, T ]; E), depend only
on the law of X.
Convention: unless otherwise stated, if the set {t ≥ 0|Xt ∈ / G} is empty, we define
τG = +∞; an analogous convention will be used in the sequel for similar cases.

5
Exercise 34. Let X be a real process, adapted to F, and let τ be a random time, such
that {τ < t} is in Ft for every t. Show that τ is a stopping time with respect to the
augmented filtration F + = (Ft+ )t , where Ft+ = ∩s>t Fs .

Exercise 35. Prove the stopping theorem for Brownian motion: If W is a real Brow-
nian motion motion with respect to a filtration (Ft )t and τ is a finite stopping time
(with respect to the same filtration), then (Wt+τ − Wτ )t is a standard Brownian motion,
independent of Fτ .

Exercise 36. Let X be a continuous process with values in R2 , such that X0 = 0 and the
law of X is invariant under rotation (i.e. the processes (RXt )t and (Xt )t are equivalent,
for every orthognonal matrix R). Let τ = inf{t ≥ 0||Xt | = 1} and suppose τ < +∞ a.s.
(see the convention in Exercise 33). Show that τ and Xτ are independent r.v.’s and that
the law of Xτ is λS 1 , the renormalized Lebesgue measure on the sphere S 1 .
We recall that λ is the unique probability measure on S 1 with is invariant under rotation
and satisfies λ([cα, cβ]) = cλ([α, β]) for every c > 0, α, β angles.
Find examples of R2 -valued continuous processes X (with X0 = 0) such that:

• τ , Xτ are independent, but the law of Xτ is not λS 1 ;

• the law of Xτ is λS 1 , but τ and Xτ are not independent;

Xt
• for every t > 0, P (Xt = 0) = 0 and the law of |Xt | is λS 1 , but the law of Xτ is not
λS 1 .

8 Martingales: examples, stopping theorem, Doob and

maximal inequalities
Exercise 37. Let M be a (continuous- or discrete-time) martingale, with respect to a
filtration F; let G be a subfiltration of F (i.e. Gt ⊆ Ft for every t), such that M is still
adapted to G. Verify that M is a martingale with respect to G.

Exercise 38 (P). Let (ξj )j be a sequence of i.i.d. r.v.’s. Let f be a measurable function
such that E[|f (ξ1 )|] < +∞. Prove that the following processes are martingales:

• Xn = nj=1 f (ξj ) − nE[f (ξ1 )];

P

• Yn = E[f (ξ1 )]−n nj=1 f (ξj ), if E[f (ξ1 )] 6= 0.

Q

Deduce that the following are martingales: ....

Exercise 39. Find an example of a martingale which is not a Markov process.

Exercise 40 (P). Let X be a process with independent increments (with respect to a

filtration F). Prove that Xt − E[Xt ] is a martingale (with respect to F).
Let Y be a process with centered independent increments. Prove that Xt2 − E[Xt2 ] is a
martingale.

6
Exercise 41 (N). Let W be a Brownian motion. Prove that Wt , Wt2 −t, exp[λWt − 12 λ2 t],
λ in C, are martingales.
Let X = (Xt ) be a continuous process, adapted to F, with X0 = 0. Suppose that
exp[λWt − 12 λ2 t] is a martingale, for every real λ. Prove that X is a Brownian motion
with respect to F.

Exercise 42 (P). Let M be a discrete-time martingale, let τ be a finite stopping time.

Prove that the process M τ , defined by Mnτ = Mτ ∧n , is a martingale (with respect to the
same filtration of M ).
Let X be a continuous-time martingale, let τ be a stopping time, suppose that the the
hypotheses of the stopping theorem are satisfied. Prove that M τ , defined as Mtτ = Mτ ∧t ,
is a martingale (again with respect to the same filtration).

Exercise 43 (N). Let W be a Brownian motion; for a, b > 0, call τa,b = inf{t ≥ 0|Wt ∈
/
] − a, b[}. Compute E[τa,b ] and P {Bτa,b = b}.

Exercise 44. Let W be a real Brownian motion; for γ > 0, a > 0, let ργ,a = inf{t ≥
0|Wt = a + γt}. Prove that P (ργ,a < +∞) = exp[−2γa].
Hint: consider the martingale Mt = exp[2γWt − 2γ 2 t] and remember the behaviour of
the Brownian motion at infinity.

Exercise 45 (N). Let X be a continuous sub-martingale, let h : R → R be a positive

convex nondecreasing function, θ > 0. Prove that

P (sup Xt ≤ λ) ≤ e−h(θλ) E[exp[h(θXT )]]. (6)

[0,T ]

If X is a Brownian motion, taking h(x) = ex and making the infimum over θ > 0, we
get the exponential bound for the Brownian motion.

9 Martingales: convergence and Doob-Meyer decomposi-

tion
Exercise 46 (N). Let M be a continuous martingale in L2 , with M0 = 0. We remind
that, since the process A = hM i is nonnegative nondecreasing, it converges to some finite
or infinite limit, as t → +∞. Prove the following dichotomy:

• on {limt→+∞ At < +∞}, M converges a.s. as t → +∞;

• on {limt→+∞ At = +∞}, it holds for a.e. ω: for every a ≥ 0, the trajectory |M (ω)|
reaches a at least one time; in particular, a.e. trajectory does not converge.

Exercise 47. Let (Mt )t≥0 be a positive (i.e. Mt ≥ 0) continuous supermartingale and let
T = inf {t ≥ 0 : Mt = 0}. Prove that, if T (ω) < ∞, then for any t ≥ T (ω), Mt (ω) = 0.

7
10 Stochastic integrals
Through all this section, let (Bt )t≥0 be a real continuous Brownian motion, starting from
0, defined on a filtered probability space (Ω, A, P, F = (Ft )t≥0 ), where F satisfies the
usual assumptions.
Exercise 48. Prove that, for 0 ≤ α ≤ β < ∞ the space M 2 [α, β] of (P ⊗ L -equivalence
classes of ) progressively measurable real processes (Xr )α≤r≤β such that
Z β 
2
E |Xr | dr < ∞,
α
hR i
β
with the scalar product hX, Y i = E α Xr Yr dr , is a Hilbert space. (Hint: it is a closed
subspace of L2 (Ω, A ⊗ B ([α, β]) , P ⊗ L ).)
Rβ
Exercise 49. (see Baldi, 6.10) Prove that, for α ≤ β, M 2 [α, β] 3 H 7→ α Hr dBr is ho-
Rβ
mogeneus with respect to the product of bounded Fα -measurable r.v.’s, i.e. α Y Hr dBr =
Rβ
Y α Hr dBr if Y ∈ L∞ (P, Fα ).
Exercise 50. (see Baldi, 6.9) If X ∈ M 2 [α, β] is a continuous process such that
supα≤r≤β Xr ∈ L2 (P) then, for every sequence (πn )n of partitions α = tn,0 < . . . <
tn,mn = β, with |πn | → 0, it holds
n −1
mX Z β


lim Xtn,k Btn,k+1 − Btn,k = Xr dBr
n→∞ α
k=0

where the limit is taken in L2 (P).

Exercise 51. Assuming that H has adapted C 1 trajectories on [α, β], prove that a.s.
Z β Z β
Hs dBs = Hβ Bβ − Hα Bα − Hs0 Bs ds.
α α

Exercise 52. On a probability space (Ω, A, P), let X be a real random variable, inde-
pendent of a σ-algebra F ⊆ A. Assuming that the law of X is N (0, σ 2 ), and that Y is
a F-measurable real r.v. with |Y | = 1 a.s., prove that XY has the same law of X and it
is independent of F.
Exercise 53.R Assume that (Hs )s≥0 is adapted and |Hs | = 1 for any s. Prove that the
s
process Zs = 0 Hr dBr is a Brownian motion.
Exercise 54. (Wiener integrals) Let f1 , . . . , fn ∈ L2 ((0, T ), L ). Prove that the random
variables Z T
Fi = fi (s) dBs ∈ L2 (Ω, P) (i = 1 . . . , n)
0
have joint Gaussian law: compute its mean vector and its covariance matrix.

8
 Let f be a locally bounded Borel function defined on [0, ∞). Prove that the process
Z ·
Z· = f (s) dBs
0

is Gaussian with independent increments.

Exercise 55. (Multiple Wiener integrals) Fix T > 0, let

∆2 = (s, t) ∈ R2 |0 ≤ s ≤ t ≤ T


and call rectangle any set R =]a, α]×]b, β] ⊆ ∆2 . Prove the following statements.

1. For any rectangle R =]a, α]×]b, β],

Z t 
Bα − Ba if t ∈]b, β]
t 7→ IR (s, t) dBs =
0 0 otherwise

defines a process IR · B ∈ M 2 [0, T ].

2. For R, R0 rectangles, hIR · B, IR M 2 = L (R ∩ R ).

0 · Bi 2 0

3. Given a function f = ni=1 αi IRi where αi ∈ R and Ri are rectangles,

P

n
X
f ·B = αi (IRi · B) ∈ M 2 [0, T ]
i=1

does not depend on the representation of f .

4. The following isometry holds:

Z
hf · B, g · BiM 2 = f (s, t) g (s, t) dsdt.
∆2

5. The map f 7→ f · B extends to an isometry of L2 ∆2 ,
L 2 into M 2 [0, T ], and in

particular f · B is well-defined for any f ∈ L2 ∆2 , L 2 as follows:

given fn → f in L2 ∆2 , L 2 , put f · B = lim (fn · B).

n

6. Define the multiple Wiener integral

Z T Z t Z T
I2 (f ) = dBt f (s, t) dBs = (f · B)t dBt ∈ L2 (P)
0 0 0

and prove that

"Z
T Z t
2 # Z
 
E  dBt f (s, t) dBs  = f (s, t) g (s, t) dsdt.
0 0 ∆2

9
Exercise 56. With the notation of the above exercise, is the process (0 ≤ r ≤ T )
Z r Z t
r 7→ dBt f (s, t) dBr ∈ L2 (P )
0 0

adapted? is it a martingale?
Exercise 57. Repeat the construction of the exercise above for any n > 2 and provide
a precise definition of
Z T Z tn Z tn−2 Z t2
In (f ) = dBtn dBtn−1 ··· dBt1 f (t1 , t2 , . . . , tn ) ∈ L2 (P) ,
0 0 0 0

for any f ∈ L2 (∆n , L n ), where

∆n = {(t1 , . . . , tn ) ∈ Rn |0 ≤ t1 ≤ . . . ≤ tn ≤ T } .

Exercise 58. With the notation of the above exercises, prove the following orthogonality
relations, for
multiple Wiener integrals: given 1 ≤ n, m ≤ m, f ∈ L2 ∆n , L 2 , g ∈

L2 ∆m , L 2 , it holds

hf, giL2 (∆n ) if n=m
E [In (f ) Im (g)] =
0 otherwise.

Moreover, E [In (f )] = 0.

11 Itô’s Formula
As in the previous section, we assume that we are given (Bt )t≥0 , a real continuous
Brownian motion, starting from 0, defined on a filtered probability space (Ω, A, P, F =
(Ft )t≥0 ), where F satisfies the usual assumptions.
Exercise 59. Using Itô’s formula, find alternative expressions for
Rt Rt
1. 0 Bs dBs , 0 Bs ds;
Rt
2. Bt2 , 0 Bs2 dBs ;
Rt
3. cos (Bt ), 0 sin (Bs ) dBs ;
Rt
4. 0 exp {Bs } dBs .
2
R t 60 (Stochastic exponential). (see Baldi, sec. 7.2) For H ∈ Λ ([0, ∞[), put
Exercise
Xt = 0 Hs dBs and prove that

1 t
 Z 
2
t 7→ E (X)t = exp Xt − |Hs | ds
2 0
is a positive local martingale.

10
Exercise 61. Prove that for any t > 0, E [E (B)t ] = 1, and limt→∞ E (B)t = 0 a.s.

Exercise 62. Define for t ∈ [0, 1[

Bt2
 
1
Zt = √ exp − .
1−t 2 (1 − t)

Show that t 7→ Zt is a positive martingale for t ∈ [0, 1[, with E [Zt ] = 1 and limt→1 Zt = 0.

Exercise 63 (Exponential inequality). (see Baldi, prop. 7.5) Let H ∈ Λ2 ([0, T ]) and fix
k > 0. Then
Z t Z T !
c2
  
2
 
P sup  Hs dBs  > c, Hs ds ≤ kT ≤ 2 exp − .
0≤t≤T 0 0 2kT
Rt
Exercise 64. Prove that, given p ≥ 2, Xt = 0 Hs dBs , for H ∈ Λ2 ([0, T ]), it holds
Z t Z t
p p−1 1
|Xt | = p |Xs | sgn (Xs ) Hs dBs + p (p − 1) |Xs |p−2 Hs2 ds.
0 2 0

1/2
Exercise 65. (A first step towards local times) Given  > 0, set f (x) = x2 + 2 ,
Rt
use Itô’s formula to show that for H ∈ M 2 ([0, T ]), it holds, for Xt = 0 Hs dBs ,
"Z #
T
h
i
2 1/2 2 2
E XT +  =E
3/2 Ht dt .
0 2 Xt2 + 2

Deduce that, for some absolute constant C > 0, it holds

Z T 
1 2
lim sup E I{|Xt |≤} Ht dt ≤ CE [|XT |] .
→0 0 2

Exercise 66 (Burkholder-Davis-Gundy inequalities). (see Baldi, prop. 7.9) Fix p ≥ 2

and show that there exists some constant Cp > 0 such that, for any T > 0 and any
H ∈ M 2 ([0, T ]), it holds
Z t p ! Z T p/2 !
Hs2 ds
   
E sup  Hs dBs  ≤ Cp E  .
0≤t≤T 0 0

In particular, this entails that

Z t p ! Z T 
p−2
p
 
E sup  Hs dBs 
  ≤ Cp T 2 E |Hs | ds .
0≤t≤T 0 0

(Actually, in the first inequality above, the opposite inequality holds too, with a different
constant.)

11
Exercise 67. Given H ∈ Λ2 [0, T ], define recursively In ∈ Λ2 [0, T ] as follows:

I0 (t) = 1
Rt
In (t) = 0 In−1 (s) Hs dBs for n ≥ 1.

Prove that for n ≥ 2, it holds

Z t Z t
nIn (t) = In−1 (t) Hs dBs − In−2 (t) Hs2 ds.
0 0

11.1 Multidimensional Itô’s Formula

In what follows, we assume that n ≥ 1 is fixed we are given (Bt )t≥0 , an n-dimensional
Brownian motion, starting from the origin, defined on (Ω, A, P, F = (Ft )t≥0 ), where F
satisfies the usual assumptions.
 
Exercise 68. Let f ∈ Cb2 (Rn ), i.e. |∇f | and D2 f  uniformly bounded. Prove that

1. if ∆f = 0, then t 7→ f (Bt ) is a martingale;

2. if t 7→ f (Bt ) is a martingale, then ∆f = 0.

Exercise 69. Let n = 2 and define

(Xt , Yt ) = exp Bt1 cos Bt2 , exp Bt1 sin Bt2 .

Compute the stochastic differential of the process (Xt − 1)2 + Yt2 .

Exercise 70. Let R > 0, x0 ∈ Rn , with |x0 | < R and let τR = inf {t ≥ 0 : |x0 + Bt | = R}.
Prove that  
E [τR ] = R2 − |x0 |2 /n.

Exercise 71 (Exit time from a spherical shell). Fix 0 < r < R, T > 0 and x0 ∈ Rn ,
with r < |x0 | < R. Let

τr = inf {t ≥ 0 : |x0 + Bt | = r} τR = inf {t ≥ 0 : |x0 + Bt | = R} τ = τr ∧ τR .

Assume n ≥ 3, write down and fully justify Itô formula for f (x0 + Btτ ), where

f (x) = |x|2−n .

Taking expectations and letting t → ∞, deduce that

   
P (τr < τR ) = |x0 |2−n − R2−n / |r|2−n − R2−n .

Letting R → ∞, prove that P (τr < ∞) = (r/ |x0 |)n−2 < 1. Deduce the following asser-
tions.

12
 1. Points are polar for Bt , i.e.
P (∃t ≥ 0 : Bt = −x0 ) = 0.

2. The process leaves every compact set with strictly positive probability, but infact it
holds limt→∞ |Bt (ω)| = ∞ a.e. ω. (Hint: strong-Markov and Borel-Cantelli).
Adapt the steps above for the case n = 2, using f (x) = − log |x| and discuss the
validity of the corresponent conclusions.
Exercise 72. Let X 1 , . . . , X d be Itô processes (defined on the same space, fixed above).
Using the differential notation dX i , d [Xi , Xj ], write as Itô processes:
1. Πni=1 X i ;
 
2. X 1 /X 2 (assume X 2  >  for some  > 0);
 k
3. X 1  , where k ≥ 2,
4. log X 1 , (assume X 1 >  for some  > 0);

X
5. X 1 2 , (assume X 1 >  for some  > 0);
6. sin X 1 cos X 2 + cos X 1 sin X 2 ;

11.2 Lévy theorem

Exercise 73. Given an n-dimensional Wiener process B, let Hs ∈ Λ2B ([0, ∞]) with
Hs Hs∗ = Id for a.e. ω, for all s ∈ [0, ∞[. Prove that
Z t
t 7→ Hs dBs
0
is a Brownian motion.
Exercise 74. Given a real valued Wiener process B, let Hs ∈ Λ2B ([0, ∞]) and assume
Rt
that 0 Hs2 ds = f (t) is a deterministic process. Prove that
Z t
t 7→ Hs ds
0
is a Gaussian process.
Exercise 75 (Reflection principle). Let B be a real valued Wiener process, and let a > 0.
Write Ta = inf {t ≥ 0 : Bt ≥ a}. Define
Z t


Wt = I{s<Ta } − I{s≥Ta } dBs
0
and prove that W is a Wiener process. Use this fact and the identity
{Ta < t , Bt < a} = {Wt > a}
to conclude that
P (Ta < t) = P (Bt > a) + P (Wt > a) = P (|Bt | > a) .

13
12 SDEs
Exercise 76. Consider the matrix
 
0 1
A=
−1 0

and the two-dimensional SDE, with additive noise,

dXt = AXt dt + σdBt ,

with X0 = (p0 , q0 ), σ = (0, σ0 ) and dBt is the stochastic differential of a real (1-
dimensional) Brownian motion. Recall the existence and uniqueness results for such
an equation and prove that h i
E |Xt |2 = |X0 |2 + σ02 t.

Exercise 77 (Ornstein-Uhlenbeck process). Consider a real-valued Wiener process B

and two real numbers θ, σ. Consider the following SDE

dXt = −θXt dt + σdBt

with X0 = x0 and prove the following assertions.

1. It holds Z t
−θt −θt
Xt = e x0 + e eθs σdBs .
0

2. The process Xt is Gaussian.

3. If θ > 0, then limt→∞ Xt exists in in law but not in L2 (Ω, P). Compute its mean
and covariance.

Exercise 78 (Variation of constants formula). Consider a real-valued Wiener process

B and two real numbers θ, σ and a continuous function f : [0, ∞[×R → R. Consider the
following SDE,
dXt = (−θXt + f (t, Xt )) dt + σdBt ,
with X0 = x0 . Prove the following assertions.

1. Xt admits the representation

Z t Z t
−θt −θt θs −θt
Xt = e x0 + e e f (Xs ) ds + e eθs σdBs .
0 0

2. Assume that f (t, x) = g (t) does not depend on x and prove that Xt is Gaussian.
Rt
3. Assuming f (t, x) = g (t) and that limt→∞ e−θt 0 eθs g (s) ds = µ, prove that limt→∞ Xt
exists in law. Compute its mean and covariance.

14
Exercise 79. Let µ, σ be real numbers, with σ = 6 0 and let B be a real-valued Wiener
process, starting from 0. Consider the following SDE:
dSt = St (µdt + σdBt ) , S0 = s0 ∈]0, ∞[.
Prove the following assertions.
1. Strong existence and uniqueness hold for St , which admits the following expression
St = s0 exp µ − σ 2 /2 t + σBt > 0.


2. The law of log St is Gaussian, i.e. the law of St is log-normal. Compute its mean
and variance.
3. Discuss the behaviour of St as t → ∞.
Exercise
R x 80. Fix T, K
>√ 0 and let µ, σ B and S as in the exercise above. Write
Φ (x) = −∞ exp −t2 /2 / 2π for the repartition function of a normal distribution.

1. Show the following Black-Scholes formula for the price at time 0 of a European
call option with expiration time T and strike price K:
 √ 
C = e−µT E (ST − K)+ = s0 Φ −c + σ T − Ke−µT Φ (−c) ,
 

where
log (K/c0 ) − µ − σ 2 /2 T


c= √ .
σ T
2. Show Black-Scholes formula for the correspondent European put option:
 √ 
P = e−µT E (K − ST )+ = s0 Φ −p + σ T − Ke−µT Φ (−p) ,
 

where
log (K/c0 ) − µ + σ 2 /2 T


p= √ .
σ T
3. Deduce the Put-Call parity for the European option:
C − P = S0 − K.

Exercise 81. Let µ, µ0 , σ, σ 0 be real numbers, and let B be a real-valued Wiener process,
starting from 0. Consider the following SDE’s:
dSt = St (µdt + σdBt ) , S0 = s0 ∈]0, ∞[,
dSt0 = St0 µ0 dt + σ 0 dBt , S0 = s00 ∈]0, ∞[

where s0 , s00 are real numbers, with s0 6= 0. Prove that if, for some 0 ≤ t1 < t2 , it holds
St1 = St01 St2 = St02
then s0 = s00 , µ = µ0 and σ = σ 0 .

15
13 Itô processes and stopping times
 
Exercise 82. On a filtered probability space Ω, A, P, F = (Ft )t≥0 , with the usual as-
sumptions, let τ be a stopping time, i.e. a [0, ∞]-valued r.v. such that, for every t ≥ 0,
{τ ≤ t} ∈ Ft . Prove that there exists a decreasing sequence of stopping times τn , con-
verging uniformly to τ on {τ < ∞}, such that τn (ω) ∈ N/2n ∪ {∞}.

Exercise 83. Let H ∈ MB2 [0, T ] and let τ be a stopping time (with respect to the natural
filtration of a Brownian motion B). Prove that

s 7→ Hs I[0,τ [ (s)
Rt
is a process in MB2 [0, T ] and that, if we write Xt = 0 Hs dBs , then
Z T
Hs I[0,τ [ (s) dBs = XT ∧τ .
0

(Hint: assume first that the range of τ is discrete and use the locality of the stochastic
integral, then use the exercise above)

16