Paper 2, Section II, J

Stochastic Financial Models | Part II, 2013

What does it mean to say that (Yn,Fn)n0\left(Y_{n}, \mathcal{F}_{n}\right)_{n \geqslant 0} is a supermartingale?

State and prove Doob's Upcrossing Inequality for a supermartingale.

Let (Mn,Fn)n0\left(M_{n}, \mathcal{F}_{n}\right)_{n \leqslant 0} be a martingale indexed by negative time, that is, for each n0n \leqslant 0, Fn1Fn,MnL1(Fn)\mathcal{F}_{n-1} \subseteq \mathcal{F}_{n}, M_{n} \in L^{1}\left(\mathcal{F}_{n}\right) and E[MnFn1]=Mn1E\left[M_{n} \mid \mathcal{F}_{n-1}\right]=M_{n-1}. Using Doob's Upcrossing Inequality, prove that the limit limnMn\lim _{n \rightarrow-\infty} M_{n} exists almost surely.

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