Homework 4

Math 455 Stochastic Calculus, Spring 2023

Question 1. In class, we have shown that if (Xn ) is a martingale, then E(Xn ) is the
same for all n. Show that the converse is not true in general using the following sequence
of random variables defined by
(
1
with probability 1/2
Sn = n 1
−n with probability 1/2.

(Assume that S1 , S2 , . . . are independent.)

Question 2. If the third condition in the definition of the martingale is replaced by

E(Sn+1 |Fn ) ≤ Xn a.s.

then the sequence (Sn ) is called a supermartingale with respect to the filtration (Fn : n =
0, 1, . . . ). (The gambling is not fair! It is unfavorable to Darya!) Suppose that (Cn : n =
1, 2, . . . ) is the gambling strategy (that is, it is previsible with respect to the filtration).
Under this situation, show that if (Cn ) is a non-negative bounded sequence, then the
martingale transform (Tn : n = 1, 2, . . . ) with Tn = C1 (S1 − S0 ) + · · · + Cn (Sn − Sn−1 ) is
a supermartingale. (Darya’s gambling strategy cannot change the unfavorable game into
a favorable game!)

Question 3. Let (Xn : n = 0, 1, 2, . . . ) be a sequence of random variables with X0 = 0

and E(|Xn |) < ∞ for P
all n, which is adapted to a filtration (Fn : n = 0, 1, . . . ) with
F0 = {∅, Ω}. Let Yn = ni=1 E(Xi − Xi−1 |Fi−1 ) and Zn = Xn − Yn .

(a) Is (Yn : n = 1, 2, · · · ) previsible with respect to (Fn : n = 0, 1, . . . )?

(b) Show that (Zn : n = 1, 2, . . . ) is a martingale with respect to (Fn : n = 0, 1, . . . ).

2
Question 4. (a) Show that E(X|G) ≤ E(X 2 |G). (Hint: Consider (X − E(X|G)2 )

2
and recall how to prove that E(X 2 ) ≥ E(X) .

Remark: In general, the following inequality (called the Jensen’s inequality) is

true. For a convex function ϕ,

ϕ(E(X|G)) ≤ E(ϕ(X)|G) a.s.

(b) Let (Xn ) be a martingale with respect to a filtration (Fn ). Show that E(Xn2 |Fj ) ≥
Xj2 almost surely for all n ≥ j.

1
Question 5. Suppose that there are one red ball and one black ball in an urn. One
ball is randomly drawn from the urn and it is returned along with a ball of the same
color. We repeat this procedure many times. Suppose that each drawing is independent
of other drawings, and let Xn be the number of black balls in the urn after n drawings,
so that X0 = 1. (For example, X1 will be 1 or 2 depending on which ball is drawn in the
first drawing.) Is (Xn ) a matingale with respect to the natural filtration?

Hint: It can be shown that E(Xn |Xn−1 , . . . , X1 ) = E(Xn |Xn−1 ). Use this property. This
is a property of a “Markov process”. Also, note that there are (n + 2) balls in the urn
after n drawings (because a ball drawn is returned along with a ball of the same color).
So, we have 
i
 n+2
 if j = i + 1
n+2−i
P(Xn+1 = j | Xn = i) = n+2
if j = i

0 otherwise
