Nondifferentiable functions of one-dimensional semimartingales

Abstract

We consider decompositions of processes of the form $Y=f(t,X_t)$ where $X$ is a semimartingale. The function $f$ is not required to be differentiable, so Itô's lemma does not apply. In the case where $f(t,x)$ is independent of $t$, it is shown that requiring $f$ to be locally Lipschitz continuous in $x$ is enough for an Itô-style decomposition to exist. In particular, $Y$ will be a Dirichlet process. We also look at the case where $f(t,x)$ can depend on $t$, possibly discontinuously. It is shown, under some additional mild constraints on $f$, that the same decomposition still holds. Both these results follow as special cases of a more general decomposition which we prove, and which applies to nondifferentiable functions of Dirichlet processes. Possible applications of these results to the theory of one-dimensional diffusions are briefly discussed.

Published in at http://dx.doi.org/10.1214/09-AOP476 the Annals of Probability (http://www.imstat.org/aop/) by the Institute of Mathematical Statistics (http://www.imstat.org)

References in corpus (1)

• Properties of Expectations of Functions of Martingale Diffusions

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