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arXiv · 1002.2446

Functional It\^{o} calculus and stochastic integral representation of martingales

Rama Cont·David-Antoine Fournié
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Abstract

We develop a nonanticipative calculus for functionals of a continuous semimartingale, using an extension of the Ito formula to path-dependent functionals which possess certain directional derivatives. The construction is based on a pathwise derivative, introduced by Dupire, for functionals on the space of right-continuous functions with left limits. We show that this functional derivative admits a suitable extension to the space of square-integrable martingales. This extension defines a weak derivative which is shown to be the inverse of the Ito integral and which may be viewed as a nonanticipative "lifting" of the Malliavin derivative. These results lead to a constructive martingale representation formula for Ito processes. By contrast with the Clark-Haussmann-Ocone formula, this representation only involves nonanticipative quantities which may be computed pathwise.

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Rama Cont, David-Antoine Fournié. 2010-02-11. Functional It\^{o} calculus and stochastic integral representation of martingales. https://doi.org/10.1214/11-aop721

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