Itô Stochastic differentials

Abstract

We give an infinitesimal meaning to the symbol $d{X}_t$ for a continuous semimartingale $X$ at an instant in time $t$. We define a vector space structure on the space of differentials at time $t$ and deduce key properties consistent with the classical Itô integration theory. In particular, we link our notion of a differential with Itô integration via a stochastic version of the Fundamental Theorem of Calculus. Our differentials obey a version of the chain rule, which is a local version of Itô's lemma. We apply our results to financial mathematics to give a theory of portfolios at an instant in time.