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I'm having trouble getting my head around the meaning of the stochastic Ito integral. Specifically: the intuitive meaning of "Stochastic Integral" to me is a function that takes a time $t$ and returns a PDF for the integral of a stochastic process on $[0,t]$. Is this indeed what Ito integrals model? If so, I'm confused about why Ito integrals depend on two stochastic processes (you integrate process A with respect to process B). How does the meaning of the integral change when process B changes?

Thanks for your help!

gmb
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3 Answers3

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I'm far from an expert here, but I've just been learning about this field so thought I might share! NB I'm not trying to be rigorous, just get the ideas across.

Let's first think of a 'standard' Riemann integral,

$$\int\limits_{a}^{b} f(x)\,\text{d}x$$

we interpret this as the limit of a sum of the areas of equally spaced boxes, each with width $\Delta x$ and height equal to the value of the function, then let $\Delta x\rightarrow 0$. So, as an approximation:

$$\int\limits_{a}^{b} f(x)\,\text{d}x \approx \sum\limits_{i=0}^{n-1} f(t_i)(x_{i+1}-x_i),$$

where the $x_i$s are a partition of the interval $[a,b]$ and $t_i$ is a value somewhere in the interval $[x_i,x_{i+1}]$.

Now let's take a stochastic Ito integral of a non-random process, $f(t)$:

$$\int\limits_{0}^{t} f(s)\,\text{d}B(s),$$

where $B(s)$ is a random process (normally Brownian motion). This isn't a PDF, it's actually a random variable itself. We can approximate this in the same way as a Riemann integral, i.e. a sum of the areas of boxes:

$$\int\limits_{0}^{T} f(s)\,\text{d}B(s) \approx \sum\limits_{k=0}^{n-1}f(t_i)(B(t_{i+1})-B(t_i)),$$

where the $t_i$s are a partition of the time interval $[0, T]$ into $n$ segments. Obviously, the larger $n$ is, the better the approximation. Looking at that expression, we can see that it's quite similar to the Riemann integral, but now the intervals themselves, whilst regularly spaced in $t$, are of random width. And a sum of random variables is itself a random variable.

It would be neat if there were a diagram showing these ideas (i.e. drawing the boxes) but I'm not sure how exactly to draw it.

If we now take the Ito integral of a random process, $X(t)$, then we have to replace $f(t_i)$ with a random variable $X(t_i)$ (I think there are several conditions you have to meet as well, I'm ignoring these here for the general picture), so the Ito integral becomes a sum of products of random variables, but again that's a random variable.

To answer your final question: changing the process $B$ means changing the process that generates our box widths, and hence changing the statistical properties of the integral.

Hope this helps, I await someone far more knowledgeable to come along and tell me it's all wrong!

Thomas
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Gabriel
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    Nice answer. I liked the idea of random width. Never heard that from my prof. Thanks – triomphe Oct 17 '13 at 19:11
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    I personally feel that there's a big flaw with the intuition this answer gives. The intuition seems to come from thinking of the Ito integral as a pointwise limit of the integral of simple functions. But it's actually the $L^{2}$ limit. And who is to say that the intuition of a pointwise limit helps in this $L^{2}$-limit case? – layman Dec 28 '17 at 19:33
  • @layman Thanks for the comment. I'm afraid I wasn't aware of this technicality when I provide the answer. I seem to recall my intuition was formed by reading several introductory textbooks, but I may have added my own deluded interpretation at the time. – Gabriel Jan 03 '18 at 16:54
  • @Gabriel it might not be deluded. I’m hoping someone can jump in and clarify if your intuition is correct, and how it ties in with the limit being under the $L^2$ norm. – layman Jan 03 '18 at 17:05
  • @layman: Doesn't every L^2-convergent sequence have a pointwise convergent subsequence? – Nathanael Schilling Apr 11 '19 at 15:40
  • @NathanaelSchilling Yes, that's true. But what is the subsequence? What properties of the subsequence carry over to the almost sure limit? Considering the overall sequence does not converge almost surely, it could be that two subsequences converge to different quantities almost surely, right? So I guess my question is, how does knowing a subsequence converges almost surely add intuition if we don't know what the subsequence is? – layman Apr 12 '19 at 00:19
  • @layman I'm not sure that we can have two subsequences that converge to different quantities, I feel like the answer should be "no, but there could be subsequences that do not converge a.e". (edit: to see this, take any subsequenc. Since it is still L^2 convergent, it must have a subsequence that converges to the (old) limit a.e, and hence it cannot converge against some different new limit a.e) – Nathanael Schilling Apr 12 '19 at 10:47
  • @nathanaelSchilling Ok, fair enough, but we still don’t know explicitly the exact subsequence converging almost surely, so how can we know what the almost sure limit would look like? – layman Apr 12 '19 at 16:41
  • @layman: well, we know the things converges in L^2, so we also know (up to equality a.e) what the limit of any (a.e) convergent subsequence will be -- it has the be the L^2 limit. – Nathanael Schilling Apr 12 '19 at 21:10
  • @NathanaelSchilling Yes, of course, that is indisputable. My point is on the behavior of the Ito integral paths as a process. Are its paths rough/irregular like a Brownian motion’s paths? If yes, I can’t see why that would follow from the almost sure convergence of the subsequence. – layman Apr 12 '19 at 21:53
  • @layman: well yes, in most cases the paths will be rough. I don't quite get your question. My point is just that the L^2 limit is is not irrelevant to the P-a.s limit as it is the only (P-a.s) accumulation point of the sequence. Though I do think that it might be possible to get P-a.s convergence of the sequence with other methods also (if f is continuous), maybe someone else can provide a reference... note that there are even pathwise constructions of stochastic integrals (e.g. Föllmer's 1981 article, unfortunately in French but there exist translations in English). – Nathanael Schilling Apr 15 '19 at 19:23
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    @NathanaelSchilling My point is I don't like the idea of using simple process Ito integration to get intuition on the limiting Ito integral. Many of these "intuition" posts describe the intuition as if the Ito integral were defined in the same mode of convergence as the Riemann integral, which is not true. And even in the case that we do get that same mode of convergence, it is for a subsequence only, and we don't know which subsequence, so we can't really get intuition from the convergence of the subsequence. – layman Apr 15 '19 at 19:29
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    Well I don't follow most of this, but I'm pleased to have catalysed such a high-level discussion!! Thanks – Gabriel Apr 17 '19 at 10:06
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I think the problem here is notational (or abuse of notation). I have never convinced myself that what is called $dW_t$ is a proper k-form (1-form) differential.

Start with a Wiener process, $W_t$. If we demand $W_t=0$ at $t=0$, and at $t=1$ we have $W_t=W_1\sim N(0,1)$ (distributes a a normal RV with mean zero and unit variance), imagine first breaking up that first unti time in half. Then, for each half, $\Delta W_t \sim N(0,\frac{1}{2})$. Now just keep breaking it up, and the infinitessimal change becomes what we call $dW_t$. Now we have our 'proper' Wiener process, where $W_t$ is the sum of infinitely many little $dW_t$'s.

Suppose that we build a new function $f(t,W_t)$ as a function of the two variables. In the deterministic case we can say $df=\frac{\partial f(t,W_t)}{\partial t}dt+\frac{\partial f(t,W_t)}{\partial W_t}dW_t$, since we can ignore higher-order Taylor terms. However, in the stochastic world one of the second partials is, unfortunately, not $O(dt^2)$ but $O(t)$: $\frac{\partial^2 f(t,W_T)}{dW_t^2}$. (See Oskedahl or Shreve.)

Fortunately, in the "box calculus" (Google it) $dW_T^2=dt$, so to speak.

Thus, a Taylor expansion has what appears to be a second-order term that must be preserved.

All of stochastic calculus is simply taking that additional term into account. To see this search for 'quadratic variation' as well as looking at the above references. At least one pdf I found did a great job of explaining why the 'deterministic' part, or determinstic Taylor expansions, don't have this oddity: quite simply, for a deterministic function, rearrange the Taylor expansion and $f(x)-f(0)=f'(x)dx+f''(x)dx^2+...$ and we know we can throw away terms with $dx^2$ if we integrate the Taylor expansion (and, in the multivariate case, $f_{W_t W_t}$ does not get thrown away...).

Hope that helps.

foobar
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I'm confused about why Ito integrals depend on two stochastic processes (you integrate process A with respect to process B). How does the meaning of the integral change when process B changes?

Already (deterministic) Stieltjes integrals $\int\limits_0^tu(t)\mathrm dv(t)$ depend on two functions $u$ and $v$.

Did
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