Assig gnment#2

May 18, 2012

Cou urse: Integrall Equations (Math-418) o h Top pic: Straton S novich Integral n structor r: Ins

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Contents

1. Stratonovich Integral a) Introduction b) Definition 2. Comparison with the It integral 3. Usages of the Stratonovich Integral a) Numerical Methods b) Stratonovich Integrals in Real-World Applications 4. References

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1. Stratonovich Integral
a) Introduction In stochastic processes, the Stratonovich integral is a stochastic integral equation, the most common alternative to the It integral. Although the It integral is the usual choice in applied mathematics, the Stratonovich integral is frequently used in physics. In some circumstances, integrals in the Stratonovich definition are easier to manipulate. Unlike the It calculus, Stratonovich integrals are defined such that the chain rule of ordinary calculus holds. Perhaps the most common situation in which these are encountered is as the solution to Stratonovich stochastic differential equations (SDE). These are equivalent to It SDEs and it is possible to convert between the two whenever one definition is more convenient. b) Definition The Stratonovich integral can be defined in a manner similar to the Riemann integral, that is as a limit of Riemann sums. Suppose that W :[0, T ] is a Wiener process and

X :[0, T ] is a semimartingale adapted to the natural filtration of the Wiener process. Then the Stratonovich integral
T

X
0

dWt :

is defined to be the limit in probability of

[( X
i =0

k 1

ti +1

+ X ti ) / 2](Wti+1 Wti )

as the mesh of the partition 0 = t0 < t1 < ... < tk = T of [0,T] tends to 0 (in the style of a RiemannStieltjes integral).

2. Comparison with the It Integral

In the definition of the It integral, the same procedure is used except for choosing the value of the process X at the left-hand endpoint of each subinterval: i.e.
X ti in place of ( X ti+1 + X ti ) / 2

Conversion between It and Stratonovich integrals may be performed using the formula

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1 f (Wt ) dWt = f ' (Wt )dt + f (Wt )dWt 20 0

where is a continuously differentiable function and the last integral is an It integral. It follows that if Xt is a time-homogeneous It diffusion with continuously differentiable diffusion coefficient i.e. it satisfies the SDE dX t = ( X t )dt + ( X t )dWt We have
T

1 ( X t ) dWt = 2 ( X t ) ( X t )dt = + ( X t )dWt 0 0 0

More generally, for any two semimartingales X and Y

T

1 c X s dYs = X s dYs + 2 [ X , Y ]T 0 0

c Where [ X , Y ]T is the continuous part of the covariation. With probability 1, a general

stochastic process does not satisfy the criteria for convergence in the Riemann sense. If it did, then the It and Stratonovich definitions would converge to the same solution. As it is, for integrals with respect to Wiener processes, they are distinct.

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3. Usages of the Stratonovich Integral

a) Numerical Methods Stochastic integrals can rarely be solved in analytic form, making stochastic numerical integration an important topic in all uses of stochastic integrals. Various numerical approximations converge to the Stratonovich integral, making this important in numerical solutions of SDEs (Kloeden & Platen 1992). Note however that the most widely used Euler scheme for the numeric solution of Langevin equations requires the equation to be in It form. b) Stratonovich Integrals in Real-World Applications The Stratonovich integral lacks the important property of the It integral, which does not "look into the future". In many real-world applications, such as modelling stock prices, one only has information about past events, and hence the It interpretation is more natural. In financial mathematics the It interpretation is usually used. In physics, however, stochastic integrals occur as the solutions of Langevin equations. Langevin equation is in fact a coarse-grained version of a more microscopic model; depending on the problem in consideration, Stratonovich or It interpretation or even more exotic interpretations such as the isothermal interpretation, are appropriate. The Stratonovich interpretation is the most frequently used interpretation within the physical sciences.

4. References
1) Qysendal, Bernt K. (2003). Stochastic Differential Equations: An Introduction with Applications. Springer, Berlin, ISBN 3-540-04758-1 2) Gardiner, Crispin W. Handbook of Stochastic Methods Springer, (3rd ed.) ISBN 3-540-208828 3) Jarrow, Robert and Protter, Philip, "A short history of stochastic integration and mathematical finance: The early years, 18801970," IMS Lecture Notes Monograph, vol. 45 (2004) 4) Kloeden, Peter E.; Platen, Eckhard (1992), Numerical solution of stochastic differential equations. Applications of Mathematics, Berlin, New York: SpringerVerlag. ISBN 978-3-540-54062-5

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