The Doob-Meyer Decomposition for Quasimartingales

As previously discussed, for discrete-time processes the Doob decomposition is a simple, but very useful, technique which allows us to decompose any integrable process into the sum of a martingale and a predictable process. If {\{X_n\}_{n=0,1,2,\ldots}} is an integrable discrete-time process adapted to a filtration {\{\mathcal{F}_n\}_{n=0,1,2,\ldots}}, then the Doob decomposition expresses X as

\displaystyle  \setlength\arraycolsep{2pt} \begin{array}{rl} \displaystyle X_n&\displaystyle=M_n+A_n,\smallskip\\ \displaystyle A_n&\displaystyle=\sum_{k=1}^n{\mathbb E}\left[X_k-X_{k-1}\;\vert\mathcal{F}_{k-1}\right]. \end{array} (1)

Then, M is then a martingale and A is an integrable process which is also predictable, in the sense that {A_n} is {\mathcal{F}_{n-1}}-measurable for each {n > 0}. The expected value of the variation of A can be computed in terms of X,

\displaystyle  {\mathbb E}\left[\sum_{k=1}^n\lvert A_k-A_{k-1}\rvert\right] ={\mathbb E}\left[\sum_{k=1}^n\left\lvert {\mathbb E}[X_k-X_{k-1}\vert\;\mathcal{F}_{k-1}]\right\rvert\right].

This is the mean variation of X.

In continuous time, the situation is rather more complex, and will require constraints on the process X other than just integrability. We have already discussed the case for submartingales — the Doob-Meyer decomposition. This decomposes a submartingale into a local martingale and a predictable increasing process.

A natural setting for further generalising the Doob-Meyer decomposition is that of quasimartingales. In continuous time, the appropriate class of processes to use for the component A of the decomposition is the predictable FV processes. Decomposition (2) below is the same as that in the previous post on special semimartingales. This is not surprising, as we have already seen that the class of special semimartingales is identical to the class of local quasimartingales. The difference with the current setting is that we can express the expected variation of A in terms of the mean variation of X, and obtain a necessary and sufficient condition for the local martingale component to be a proper martingale.

As was noted in an earlier post, historically, decomposition (2) for quasimartingales played an important part in the development of stochastic calculus and, in particular, in the proof of the Bichteler-Dellacherie theorem. That is not the case in these notes, however, as we have already proven the main results without requiring quasimartingales. As always, any two processes are identified whenever they are equivalent up to evanescence.

Theorem 1 Every cadlag quasimartingale X uniquely decomposes as

\displaystyle  X=M+A (2)

where M is a local martingale and A is a predictable FV process with {A_0=0}. Then, A has integrable variation over each finite time interval {[0,t]} satisfying

\displaystyle  {\rm Var}_t(X)={\rm Var}_t(M)+{\mathbb E}\left[\int_0^t\,\vert dA\vert\right]. (3)

so that, in particular,

\displaystyle  {\mathbb E}\left[\int_0^t\,\vert dA\vert\right]\le{\rm Var}_t(X). (4)

Furthermore, the following are equivalent,

  1. X is of class (DL).
  2. M is a proper martingale.
  3. inequality (4) is an equality for all times t.

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Properties of Quasimartingales

The previous two posts introduced the concept of quasimartingales, and noted that they can be considered as a generalization of submartingales and supermartingales. In this post we prove various basic properties of quasimartingales and of the mean variation, extending results of martingale theory to this situation.

We start with a version of optional stopping which applies for quasimartingales. For now, we just consider simple stopping times, which are stopping times taking values in a finite subset of the nonnegative extended reals {\bar{\mathbb R}_+=[0,\infty]}. Stopping a process can only decrease its mean variation (recall the alternative definitions {{\rm Var}} and {{\rm Var}^*} for the mean variation). For example, a process X is a martingale if and only if {{\rm Var}(X)=0}, so in this case the following result says that stopped martingales are martingales.

Lemma 1 Let X be an adapted process and {\tau} be a simple stopping time. Then

\displaystyle  {\rm Var}^*(X^\tau)\le{\rm Var}^*(X). (1)

Assuming, furthermore, that X is integrable,

\displaystyle  {\rm Var}(X^\tau)\le{\rm Var}(X). (2)

and, more precisely,

\displaystyle  {\rm Var}(X)={\rm Var}(X^\tau)+{\rm Var}(X-X^\tau) (3)

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Rao’s Quasimartingale Decomposition

In this post I’ll give a proof of Rao’s decomposition for quasimartingales. That is, every quasimartingale decomposes as the sum of a submartingale and a supermartingale. Equivalently, every quasimartingale is a difference of two submartingales, or alternatively, of two supermartingales. This was originally proven by Rao (Quasi-martingales, 1969), and is an important result in the general theory of continuous-time stochastic processes.

As always, we work with respect to a filtered probability space {(\Omega,\mathcal{F},\{\mathcal{F}_t\}_{t\ge0},{\mathbb P})}. It is not required that the filtration satisfies either of the usual conditions — the filtration need not be complete or right-continuous. The methods used in this post are elementary, requiring only basic measure theory along with the definitions and first properties of martingales, submartingales and supermartingales. Other than referring to the definitions of quasimartingales and mean variation given in the previous post, there is no dependency on any of the general theory of semimartingales, nor on stochastic integration other than for elementary integrands.

Recall that, for an adapted integrable process X, the mean variation on an interval {[0,t]} is

\displaystyle  {\rm Var}_t(X)=\sup{\mathbb E}\left[\int_0^t\xi\,dX\right],

where the supremum is taken over all elementary processes {\xi} with {\vert\xi\vert\le1}. Then, X is a quasimartingale if and only if {{\rm Var}_t(X)} is finite for all positive reals t. It was shown that all supermartingales are quasimartingales with mean variation given by

\displaystyle  {\rm Var}_t(X)={\mathbb E}\left[X_0-X_t\right]. (1)

Rao’s decomposition can be stated in several different ways, depending on what conditions are required to be satisfied by the quasimartingale X. As the definition of quasimartingales does differ between texts, there are different versions of Rao’s theorem around although, up to martingale terms, they are equivalent. In this post, I’ll give three different statements with increasingly stronger conditions for X. First, the following statement applies to all quasimartingales as defined in these notes. Theorem 1 can be compared to the Jordan decomposition, which says that any function {f\colon{\mathbb R}_+\rightarrow{\mathbb R}} with finite variation on bounded intervals can be decomposed as the difference of increasing functions or, equivalently, of decreasing functions. Replacing finite variation functions by quasimartingales and decreasing functions by supermartingales gives the following.

Theorem 1 (Rao) A process X is a quasimartingale if and only if it decomposes as

\displaystyle  X=Y-Z (2)

for supermartingales Y and Z. Furthermore,

  • this decomposition can be done in a minimal sense, so that if {X=Y^\prime-Z^\prime} is any other such decomposition then {Y^\prime-Y=Z^\prime-Z} is a supermartingale.
  • the inequality
    \displaystyle  {\rm Var}_t(X)\le{\mathbb E}[Y_0-Y_t]+{\mathbb E}[Z_0-Z_t], (3)

    holds, with equality for all {t\ge0} if and only if the decomposition is minimal.

  • the minimal decomposition is unique up to a martingale. That is, if {X=Y-Z=Y^\prime-Z^\prime} are two such minimal decompositions, then {Y^\prime-Y=Z^\prime-Z} is a martingale.

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Quasimartingales are a natural generalization of martingales, submartingales and supermartingales. They were first introduced by Fisk in order to extend the Doob-Meyer decomposition to a larger class of processes, showing that continuous quasimartingales can be decomposed into martingale and finite variation terms (Quasi-martingales, 1965). This was later extended to right-continuous processes by Orey (F-Processes, 1967). The way in which quasimartingales relate to sub- and super-martingales is very similar to how functions of finite variation relate to increasing and decreasing functions. In particular, by the Jordan decomposition, any finite variation function on an interval decomposes as the sum of an increasing and a decreasing function. Similarly, a stochastic process is a quasimartingale if and only if it can be written as the sum of a submartingale and a supermartingale. This important result was first shown by Rao (Quasi-martingales, 1969), and means that much of the theory of submartingales can be extended without much work to also cover quasimartingales.

Often, given a process, it is important to show that it is a semimartingale so that the techniques of stochastic calculus can be applied. If there is no obvious decomposition into local martingale and finite variation terms, then, one way of doing this is to show that it is a quasimartingale. All right-continuous quasimartingales are semimartingales. This result is also important in the general theory of semimartingales with, for example, many proofs of the Bichteler-Dellacherie theorem involving quasimartingales.

In this post, I will mainly be concerned with the definition and very basic properties of quasimartingales, and look at the more advanced theory in the following post. We work with respect to a filtered probability space {(\Omega,\mathcal{F},\{\mathcal{F}_t\}_{t\ge0},{\mathbb P})}. It is not necessary to assume that either of the usual conditions, of right-continuity or completeness, hold. First, the mean variation of a process is defined as follows.

Definition 1 The mean variation of an integrable stochastic process X on an interval {[0,t]} is

\displaystyle  {\rm Var}_t(X)=\sup{\mathbb E}\left[\sum_{k=1}^n\left\vert{\mathbb E}\left[X_{t_k}-X_{t_{k-1}}\;\vert\mathcal{F}_{t_{k-1}}\right]\right\vert\right]. (1)

Here, the supremum is taken over all finite sequences of times,

\displaystyle  0=t_0\le t_1\le\cdots\le t_n=t.

A quasimartingale, then, is a process with finite mean variation on each bounded interval.

Definition 2 A quasimartingale, X, is an integrable adapted process such that {{\rm Var}_t(X)} is finite for each time {t\in{\mathbb R}_+}.

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