# Applications of the quadratic covariation differentiation theory: variants of the Clark-Ocone and Stroock's formulas

## Author Info

• Hassan Allouba
• Ramiro Fontes
Registered author(s):

## Abstract

In a 2006 article (\cite{A1}), Allouba gave his quadratic covariation differentiation theory for It\^o's integral calculus. He defined the derivative of a semimartingale with respect to a Brownian motion as the time derivative of their quadratic covariation and a generalization thereof. He then obtained a systematic differentiation theory containing a fundamental theorem of stochastic calculus relating this derivative to It\^o's integral, a differential stochastic chain rule, a differential stochastic mean value theorem, and other differentiation rules. Here, we use this differentiation theory to obtain variants of the Clark-Ocone and Stroock formulas, with and without change of measure. We prove our variants of the Clark-Ocone formula under $L^{2}$-type conditions; with no Malliavin calculus, without the use of weak distributional or Radon-Nikodym type derivatives, and without the significant machinery of the Hida-Malliavin calculus. Unlike Malliavin or Hida-Malliavin calculi, the form of our variant of the Clark-Ocone formula under change of measure is as simple as it is under no change of measure, and without requiring any further differentiability conditions on the Girsanov transform integrand beyond Novikov's condition. This is due to the invariance under change of measure of the first author's derivative in \cite{A1}. The formulations and proofs are natural applications of the differentiation theory in \cite{A1} and standard It\^o integral calculus. Iterating our Clark-Ocone formula, we obtain variants of Stroock's formula. We illustrate the applicability of these formulas by easily, and without Hida-Malliavin methods, obtaining the representation of the Brownian indicator $F=\mathbb{I}_{[K,\infty)}(W_{T})$, which is not standard Malliavin differentiable, and by applying them to digital options in finance. We then identify the chaos expansion of the Brownian indicator.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://arxiv.org/pdf/1011.1475

## Bibliographic Info

Paper provided by arXiv.org in its series Papers with number 1011.1475.

as
in new window

 Length: Date of creation: Nov 2010 Date of revision: May 2011 Publication status: Published in Stochastic Analysis and Applications, 29 (2011), no. 6, 1111-1135 Handle: RePEc:arx:papers:1011.1475 Contact details of provider: Web page: http://arxiv.org/

## References

No references listed on IDEAS
You can help add them by filling out this form.

## Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

## Corrections

When requesting a correction, please mention this item's handle: RePEc:arx:papers:1011.1475. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (arXiv administrators)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.