Sochate Mechanics Random Modis and tage Sides Mathematical Economics Stochastic Optimization nd France Stochastic Control aed by Advisory Board Springer fein Hehe fei a ar Applications of Mathematics Stochastic Modelling ‘and Applied Probability 43 1 Karta M. Yor P. Brémaud E Carlen W. Fleming D. Geman Grime G.Papanicolaow 1 Scheinkman‘Applications of Mathematics Jiongmin Yong Xun Yu Zhou 4 tr, ec on Cn 97) Stochastic Controls 1 opm See Hamiltonian Systems and HJB Equations 11h Browsan Maio (380, 1} Heseae Conte rt Meds in Opinion 58) 1 ete Ste Fring Tey 980) 1 Ror Conneld Dito Prose 88 1 Pele Slot tre Prose: Que sree Ri Dams, snd Dain Common Sco E558) 1e Repos Sal sian: Apa Theory 951) 17 Cour, Opa: Theor and Aplin (182) 1 se, tc Casa Appin (952 {5 Macau, terre Meds and Tar xroplion (1983) 2 Man Seton of Cate stems 389) 22 fs, Scone tga et Dern Easton (17) 1 Decbachieverout Adee Alerts an Sicha Apron 1990) 2 eee: None Seon of Stachaste Dre Egstons (93) at bagi, Numer Mats fr Stal Catre Probleme in onus Tine 92) 25 Braap So, Contd Maroy Proc ond Voy Stone (93) 2 td, men of Quening Thar (358) 75 Menge Artes Hanon Pel and Daan Mote Cro Mus: An edton to Mamata A958) 2 ep Cy Reprtans aron Proce (1935) 7 recpoeahooe den Mare Modes: xian and Cutt 95) 10 esl, ine Tne Maroy Ctr Proce @ springerSgn Yon Yan Yaz Depa f Mater Tipe Systm ceca Por Uaen “ai apaay Semen ‘Sona SOS, cna spe ine Dy ne Kne Bite g on neg ie RIE RRNA. ‘rei teh ie FOR ENR ee Yo Ha. rapes RC Qing Zhow and Caen Shen SSO Cn ST HF, SO Cs, T P, Mes Ler ooops Caner Dae Ye tea er st 8 nee gn of mens: 8) cece adie tsa 0.67241 Sper New ak Ben Mabe SS OSTPreface ‘As is wll known, Pontryagi's maximum prieple ad Bellas dynamic ‘Programming ave the two propa net commonly wal sprees in tsing sth optimal contre robles An intersting nomenon fone can olmerve fom the Htratares that thes two approaches have been ‘dwlops separately and independently. Since both methods are wed to Investigate the sume problems, natural question one wil as isthe fa Ioming (Q) Wit ithe retatonstip etme the maximum prac and dy sami programing ia sochatie optinal contol? “Thor id exit sone rscarees (prior to the 1980) onthe rdatlonship tren thee two, Nevertele, the rer uml were sat a heurse rms and prove unr rahe eestitiveansumpions, which wee nak thd in mot aes In the satemert of « Potryagntype maximum pincinle there an adjoin equation, wh isan cra difeertial eqatson (ODE) ithe (fnite-dimerstnal deterministic cme nd a stochati dieretil equation (SDE) inthe soca nse ‘The system conniving of the aoa equa ‘on, the orginal mate equation, ad the maxim corliton is referred tou an (extend) Hmatonion system. On the oer hand i Bean's Aynamie programming, there © «peril diferent equation (PDE), of fine onfer inthe (Snit-cimensonal) detente ease and of second or- der in the stochastic cane. Ths = known as « Hamilon-Jaco- linen {1018 eqution. This ens othe Flowing auton, whichis ext 1 reprate of Question (Q) (Q’) What isthe reatioship ocween Halonan systems and HU ‘enations? (0, even more geerally, (Q) What ithe rlatoneip between ODEX/SDBs and PDE? Once the auton sake this way, one wil immediatly realize tha similar qorstions hve already bocn or are bog oddred and studied in ‘er fiks.Let um briy reall tn below Analytic Mechanics. Using Halton picile and Legend's teamformation, ome can describe dynamics of ystem of pris Uy a Hire, iy « sochastic opin contol problem we mean a completely tuered contol probe wi sate equation ofthe M8 ype and wi ‘emt funcional ofthe Bales types see Chaper 2 for detail When the ‘ion coin fe een nro, and Ue controls are resected to ‘eters fanclons, the problem rece 0 a deter ptifamily of ODEs cat Hain’ cononcn stom the Hemilnian sy fem. On the other band, by itrodaing Hamilton’ principal faction ont ( deerbe the prticlesyaten ty « PDE calle the Mamaon Jacl 20) uation. Those two ways are fact equlet inthe sense ta the sla ‘one of the canonical ayst ea be epreseted by that ofthe HY oquation, fn vce vera One cally sees a srongenalogy between optimal contol {inl anaytc echoes, Ts i ot warping. however ios the elas (neal of variations, which the foundation of analyte moc, Indeed the origin of opine eostel theo Partial Differential Equations. Theresa clasinl method of char- acters in slving PDB More speccally, fra fas-oder PDE, there tha amoclted faily of ODEs for curves, elledchaectratic rp by tthich the sluts tothe PDE. can be constructed. In the context of (Geterasite) opti control, the Hamann system involved in the fran printers a the charters fr the HL uation In ‘hive inthe dytante programming Stochastic Analysis, The sachste version ofthe method of eat ceric the Foyeman Kc Jormila, which repre the slutons to ‘incor second-order parabolic elle PDE. by the to sore SDEs. On the eto band a reves repeseration hia heen rocatly developed via the so-called four-step aseme, which represents the sltion toa coupled formar backward SDE by thom ta PDE. A determine version ofthis {s Geely related to the scaled ovaront embedding, which wa studied ty Balan olaba Wing Economics. The ly to undentandig te canoe laterpcation of cpa control ihanty le the shadow pic of resource undet considera on. ‘Tie very dfnition ofthe shadow price erigiaies fom one ofthe Fntomips between the maximm prineple and dynemie programming, ‘pamely, the shadow ple (adjoint warble) isthe fate of change ofthe Drefortiance measure (enue foretion) with eespact to the change of the ‘ures (tae vali) Finance. ‘The eebrated Black Scholes forma indeed gives noth ing but a way of representing the option pice (which i the solution toa trchwacd SDE) by th maton to the Black-Scholes equation (which i paraboe PDE), Inerestingly enough al the relationship xeribe above canbe cap tured by the lowing simple, generic mathenatcl formas: 9 = H0.200), where (40) safes some ODE/SDE and # sais sme PDE. For rama the rlaontlp between the maximum pezepe and dyumic ‘prowamiieg, (2,0) the soltion to Use Hanlon syster and Pf the gadint n the spatial arabe ofthe valu fnction (which ‘he wlio to the HIB equation). In tha Black Seas model, 9) the option price, 20) the underying tock ple, and ste ation tothe Black Scholes PDE. Before saying Question (Q), oe ha ett ele the allowing two probes (P1) What ic general stochastic maximus peopl If the difasion depos on the ona ad the control domain not neces convex? ‘This problem hasbeen investigated sinc tho 1960. However, almost al the rele prior to 1980 sure that the elfsion erm does not depend ‘ the control mrable and/or the difusion pends on the contro bat {he coirl domain convex. Under these assumptions, the stalements of ‘he maximum prnepe and Use profs are very touch parallel to those of {he determinate ease One docs nots much essential dflerence bene Nodhatle and detrminiaie systons fom thse rests, “The stochastic ‘anit pipe fo spor with ctl depen difson cotiients {hd pony noneocnexcotrldocans had lng ben an outstanding open ‘robe wat 1983, (82) Hom ic oe to dea withthe inorentnonsmoothness when sty ing he rationhip beewee to maxi palpi and dynamic progran- ‘The relationship navodably evolves the darivativs of the vale fe tion, which ss wel known could be noasmooth in even very spe cass. aang 1987-1980, «group by Kunin Li at the state f Math trmaticy, Pdan Univer nluding ing Ha, Jn Ma, Shige Pong, and the two author ofthe preset book, wns tying those probs a elated Sou in thir weekly seminars ‘They fost on tackling te conto} Gepondootdifson cles, and thi instnee was based on the following bebe Oniy when te conta /decors cold or would infuence the wale cl uncestainy (os inded the ease n many patel syste, especally {ih the are of finance) othe stochastic problems dir from the deter taiisie once, Inthe seating environment ofthe seriars, Problems (1) and (2) wer soled almont atthe sare ime in Inte 198, based on the lareduction of the s-alled second-order adn! equation. Specialy, Peng, ten « postnctoralSllw at Puan, salve Problem (P2) by eos ‘ing the quadratic term fo the Tslor oxpasio ofthe spike variation, tin which be esate ae fore of masium principle for stochastic ‘pla conics On the aber band, Zio (who was thon a PhD. tude 2 Pan} found «power way forslving Problem (P2). By utlzing vis text alton they, he manage to disse ue relationship between the frtordr (respectively, second-order) adj eqution ad the fs-order (Cespectively,scond-onde) dermis of the value functions. Ar 1989, ember ofthe Fudan group wert to diferet ples in the wor but the ‘ccreh they cared out at Paden forme the foundation of tht frtor re ‘earch. In patieder, studs on toning baceward and frward-backwarSSDE& hy Pardows-Peng, aud Mo Yo are natural extensions of tow {he (linear) aijoint equations in he stochastic maximum principle. This fashionable thw son bark notble opie stan probblistaa con- trol Unsrsts,ane ound interentng appications in stohastc analy, PDE {hoor aud tinhemalical finance. ‘The remariate wor on the nonlinear ‘gran Kec formula representing sostions to ronnar PDES ty those to luckward SDE) by Peng andthe fourstp scheme (representing sok om to formar backward SDE by tse to PDEs) by Ma-Protir Yong free again remind ws about ther palgy fa stochastic onto names the ‘avorchip beeweenstocharbe Hamitonian sptens and HJB equations. ‘On he other hand, (tacks) verifeaton Unorems by Zhou ant Zio YY Li by teas viscontty witors are exersion ofthe relationship teensex the maximum peng and dyamie programming frm ope o00 tontols to feedback coutrols The verifeatlon theorems lead to optimal ffecbuck eyes without volving derivatives of the value functions. Fs tly, the rent work by Chen-L 0%, Chen- Yong, and Chen-Zho. of ‘Nocaste linear quadratic (LQ) controls with idee contol weighing ‘rate in ets democrats how fundamentally diferent is when tbe ts enters into the difision term. The LO case also provide an ‘portant example where he maxims pinple and dynam programing Gre equivlent vin the sochete ical eqn. “The purpose of tis book i to give a mytenatie and sfcontained prsenaton ofthe work done by the Fudan roup and elated work de Eprether, withthe core being Ux stuly on Question (Q) or (@)- Ia thor mor the thee of he book so nif ee msimum pence and ‘yma pregamming and to demmonstate that vical elution Theory provides a nice framework to any them. Whie the main context sin Fochasti optimal contol, we ty whenever pomible to discos some in ‘tise reatonship among ODEs, SDE, and PDEs that may go beyond ‘onta teory, When writing te book, we paid every atterion to te o> once am consstency of the aerials poset, so that all he capers Ae cowly at to ch other to suppor the central theme. Ts some Sense, the iden ofthe whole Bock maybe boll! dawn to the singe fr tmulsy() = Az) which wes mentaned ear. That sald, we do nok ‘ant trivial thingy rather we wat to emphasize the common round (St ecningly ifere theories ierent areas In this pepe, the Block chokes formal, for stapes, would bot suprise a person whois fama wth mechanics o the Peynman-Kae formula ‘ot now setch the main contents ofeach chapter of th boa: [Chapter 1. Since th book ected tobe slfcottaled, some pre- lininaty materiale soe eal are presente Specialy this ‘Super collects woions and resus Sn orate eles sented aro ‘nib icratre thas are related to stochatieeoaol Tt ao unis termi ogy and atin (which nay er i diet papers/books) that ar> Pole x to be wid in tater chapters, Thee nti re mn for beginners 4, ‘Gaduate cents. ‘They nso serve a quick reernce fr knowiedgele readers ‘Chapter 2. The sochastic optimal cotel problem is formulae’ and ‘onus eaapls of ren aplcatios are given, Howeve, the chapter starts ‘Sith the deterministic ese. This pect of bogialng with deterninitic [rte i erred out in Chaptery 3-6 ae well The resons fo doing ‘ESvare not oly hot the determine cave Isl may conaln important ‘Sa Imevesting vols, bat alo that readers ean st the essen ile ‘ice tween the determine and socate sytem. Inthe fortalaio Ststochaste coutcl problems we inteducestong and weak formations hd empliie the dferencebetwoon the two, which snot sully seled Sut expy in the Iersure, Stochastic control mele ote thn the “Mandar” ve stuiog in tis Book areas briety diced. This chap- er aly provides ery extensive iersare even ranging rom the very ‘rin of cptinal conta pablens to all the models and applied examples presented in ths chap. (Chapter 8. A stochastic Hamiltonian sstm is ntrduced that com sis of two backward SDEs (ado equations) and one forward SDE (the ‘gual mate equation) along with a maxemam condition. ‘Tho geperl ‘ethane maxim principle the sted and proved. Cases with term (alee contests ad mfiency ofthe maximum preepleaedvcused, ‘Chapter 4. Fist » sochaste veron of Beiman's principle of op. tinuliy fb proved by vin ofthe weak formulation, based om which HIB frrntons are Srived. ‘The vieeity solution is inttodod o Ue tot to Rnd the inorent nnsmoothnes ofthe value factions. Sere properties (tibevaluo functions and viemy solutlons ofthe HID equations ae then ‘died Ie iscrphasan! Unt te tine variable ere plays a special ole due to the noventcpaivenss of the saderving sytem. Finally, «simpli feo! (compared wih the exiting ove) of the uniqueness ofthe vsonty ota ie prevent Notice that the veriBeationtachnigue involved in ‘he dynamic programing deere to Charter 5 (Chapter 8, Chas Hasiliag-Socobi thor in mechani eviews fit vo demonstate the oxgn of the stay of the relation between the maximum pincile snd dyeamie programming. The réiatonsip for Cdtermniatie sotems i investigated and compard with the method of Charactristics In PDE thony, the Feynman Kae formula in probably {theory and the shadow price fn economies, The telasionship fo tocastie ‘tem then sted. T slate with the case where the wa funtion BBamooth to give sme feng, flowed by a detailed ana for Ue tonsmooth cas, Finally stehase vrfcatin theorems workable fo Ue tommmoath situation are gen, and the constuction of optima fendback ‘nro incl ‘Chapter 6, This hupter investigates a spoil ese of pial cota probleme, namely the linear qari peal onto probes (LQ prob-lems). They constitute an extremely important ens of opal control roblema, andthe soliton of LQ problems extibitclgant properties due to ther simple ond nce stretaren They als nicely oxen he general theory developed in Chapt $5. Inthe ehapter an LQ problem is iat {teat an an optimization problem nan infin dimensional spac, and trot reel are obtained to give sights. Then linear optimal sate feedback i sablabed via the cocalled stochastic Rice equation. 1c pointed out that both the maxim piaiple and dynamic programing an led to the sochate Rica etn, by whith ore can see more ‘early tho relationship between the mama pencpe and dynamic prox ramming (actualy, thee wo approaches are equtlen fn the LQ cme). ‘Woomphasee that he costal weighting mates Inthe cot are slowed to be indefite im our formulation. Three, is eset ifr ftom tho deterministic cane. Stocatle Rect! equations are extemivdy ‘uid for various cass. Fialy a a xarple,etea-varince portfolio felction solved ty the LQ wth devloped ‘Chapter 7 This chapter presents the atest development on backward ad forward bcknard SDE, ith an emp on the reatonsbip bates ‘onlncer SDEa and noclincar PDEs, ARhouth the topic is ths chapter { beyond the scope a tochastlecoatrol, they oinate from stochastle ‘Seizes es eaten! ear, The chapter bopce withthe eral argu ‘nent of Bismat for studying lca backevard SDE by ing Us martingale ‘eprecntation tncore, ‘Then the stance and wniqune of sltians to ‘online backward SDES are ivestgatod for wo types of ie durations, rite Seerminsti horton snd random hott, hy wre of to diferent Incthods, Feynman Kactype formulae with pee. to both forward nd aekeward SDEs are peste. Next, abt of nro he Feynman-Kac- ‘ype formula, the called fourstp scheme, which represents lutions to forward backward SDEs by thas to PDE, is dscuso Sofabiisy and tonolvabiity of frward-backvard SDEs te also analyzed. Finally, the Blok Scholes fran option psig i derived by the ourtep scare “The ide of writing sch 8 book was aon i ate 1904 when JY wa visiog XYZ a Hong Kong. While dscusng the stochastic veriation ‘orem, they realed that the series of works dane bythe Padan group were rch enough for « book, and there should be a book as sytem ‘tie acount of Use reals. ‘Tho plan became frm with eaconragemet from Wendel! Fleming (Brows), lonnnis Karatas(Colurbia), ae Xun Jing 1 (Pon). The authors ate greatly indebid to Robert ot (AL terta), Wendell Fleming (Brown), Usch Haussmann (British Colambi), Ioannis Keratzas (Caimi), Thomas Kurta (Wconsia Madion), Moto Soncr(Princcton}, and Michal Tats (SUNY’Stony Brook), who sub- ‘tata reviewed some or all chapters, which Id to much improved Version. Micha! Keilmann (Konstanz) and Andrew Lim (CUHK) read Carey Inge portions of the maninerigt and fred sumer hla ‘Bepetions. During various stage i the prong, fouryonr couse of the pt, many experts and frends have shown thee coneern and en urgent, cacy thr carments, o set thet earch works for fhe book. "Among tema the flloving deserve special mention Alin Benson (CNES), Leanard Beovte (Purdue). Giuseppe Da Prato (Geuela Normale Super), Darel! Duc (Stanford), Tyrone Duncan (Kenss), Fuste Gort (Scusla Normal Supers), Suzanne Lenhart (Ten- ‘nove, Zong Li (Minnesoto Dalth), Joba Moore (ANU), Mako Ne Sb (Kobe), Boren Palle Duncan (Kanes), Thomas Sldman (Maryland Batimore County, Hiroki Tana (Keio, Wing Wong (CUHK), Jinan Yan (Acodein Sinica), George in (Wayne State), asd Qing Zany, (Gor a) Eepocaly both authors would kn to expres appreciation to ther {one-time teaches and/or caleagus in the Fan group Shoping Chen (dining), Ving fa (Rennes), Xorg ti (Padar), Jn Ma (Purdue), Shige Png (Shandong) nd Stanian Tang (Pidae), whose elegant rescarch work provided rich saree fr tis book. SFY onl lie to alowed the pata msppoet from the Natural Sc ‘ence Fondation of China, the Chine Education Minis Sclanee Foun tion te National Outstanding Youth Foundation of Chis, and the Li Foundation at San Franco, USA. Tu partieoar, with he Bnancal suppost ‘fe Rrsnarch Felonip a the Chinese Univers of Hang Kong (CUHK), SY val RV a CUHK in the Spring of 19 for bal «yar whch ade it ponible fo thet ators to all concentrate on Snag the book. Tr the earer of XV2, he bas tee infneed cnormousy by three scholars: Xining 1 (Pada), Makiko Niso (Kobe) and Hiro Tanna {Keo}, whores the privege of having woried With for substantial period of tie, and he would Hart tke his opportunity o pay ther his ghost respect Also, he wold ike to adowlegs the support from the Research Gott Coanel and Additonal Funding for Industry Suppor. of ‘the Hong Koag Goverment, nd the Mainline Rasch Scene of CUHK. I has own a truly ctjoyble experience to work withthe sal at Springer Vriag, opeialy the excetie editor af satis John Kimmel fan the ompedioe David Krarc, wwe Belpu and profesional evicw forthe boa are gratefully acknowledged "as, tt el both thors would Ba to thank thei fares or thei Toa lasting suport and lowe. JY, Shang XY%, one Kons November 1908Contents Preface Notation ‘Assumption Tadex Proilem Index : [Chapter 1. Basie Stochastic Caleulus i 1, Probability 111 Proalyspaes . 112, Random variables 1. Conditional expectation 1A. Conergece of probebtis 2. Stocatie Procoses . 221. General corserations 122. Brownian motions. 8. Stopging Times ‘ 44 Martine : 15 RS tog. : 51, Nondiferennility of Brownian motion 52, Definition of 3's integral and base propertos 53, R's formals A Martingale representation theorns 6 Stocustic Difoentil Equations. SL Stong solutions. . 2. Woaksoions 63, incr SDEx 4. Other type of SDE Chapter 2. Stochastic Optimal Control Problems a 2, Introduction i 1 2, Determine Cass Revit 5. Examples of Stochastic Contrel Problems. 41. Production planing 432. Lavestment ve conmmplion 433. Renmuranes and dividend management 3 Tecnology difson '35. Queuing ystoms i envy eae 4 Formulations of Stochastic Optimal Control Probes {U1 Stong formulation 42, Wek formulation 45, iste of Option Conta ICA dorian eat 52 Bxinteno under song frsation agazeeesssans53, Exatence under wea formation 6, Reachable Sets of Stohartie Control Stes, 51. Nonconvexity ofthe reachable wt 152. Nonclosnes ofthe eachable et. +Other Stochate Cost Models ‘El. Random durtion 12. Optimal stoping 72. Shgular and pele conta TA. Riseenative conte. 1, got control fs 16, Partly bearable pens 8. Horta! Remsen (Chapter 8, Maximum Principle and Stochastic Haraitontan Systems fe 1. Introduction . 2. The Determinutle Casa Revisited 4. Sttement ofthe Stodastic Maxam Principle SL Adjit equations 382. The maximum principle and socwatic anitonian stems 33, A worket-ot example ACA Pro of the Maximum Principe 41. A moment etimate : 42. Taylor expamsions oo 443. Dinlityonaas and completion ofthe proof 5 Suesent Conditions of Optnaiy 6 Problems with Stave Conseaats... G1, Formation of te probe aod the maximum peice (62. Some preliminary lemmas 63. A proof of Theorem 61 17. Hino! Remark Chapter 4, Dynamic Programming and HIB Equations 1. Intodction : 2 The Determine Case Revised 5 The Stochastic Prccipe of Optimality andthe HUB Equation 2.1, A ochate feawork for dynamic programming, 32 Principle of optimality 33. The HID equation 4 Other Propertin af the alas Fucton 41 Continua dapendence on parametors 442. Semiconeaity 5. Visco Slatin Su Definitions 52. Some proper [ Reggeezaezae mi uM us ug 183 187 188 1% 178 10 12 18 184 186 180 10 19% 6, Uniquonot of Viscoty Sottons 1A wriqueness theorem 62, Pro of Lemmas 6 and 7 7. Historia! Remar, (Chapter 5. The Relationship Between the Maximnam Principle and Dynamic Programming 2 Introduction 2 Clams! Hamilton Jacobi Theory 3: Relmonship for Deterministic Syste S11. Adj variable ned ale fnction: Sat ce 132. Boonomie interpretation ‘83. Methods of characeristics and the Fenn iee forma ‘34. Adjin variable and vale finction: Nommooth ase ‘38, Version theorems, 4 Relationship for Stohate Syste 41, Simoth ase 42. Nonstooth cas! Dirt in the spatial variable. 443, Nouezooth case; Dilleenils nthe tne vaible 6, Stochastic Veriton Theorems Smooth ese 2. Nonstoath case 6. Optimal Fuedback Coates 7 Hbtokeal Remar reso i ‘Chapter 6. Linear Quadratic Optimal Controt Problems 1. Introduction 2. The Deterministic LQ Protons Revised 21, Fonsi, 22. A minirizationprolom of « quate funcional 2. liner Magaltaetan systm sso 2.4 The Kiceall quation and feodback opinal conto 3 Formulation of Stosiartic LQ Prablens SLL Statement of the problems 32. Beams : 4 Finiteneas and Scat 5. A Nossmary Condition anda Hamtonian Syst. 6. Stocbutie Rico Equations 7 Gleb Slmbity of Stochastic Riceat Equations Ti Existeno: The standard ease 12. Eisen: The ene C= 0,8 —0 and Q,G20 74. Exitenoe: The onedinesnal ce A Mean variance Porfolo Section Probie, 8 Hioial Remar, 108 m2 219 am 20 2a 2 25 an 255, 28 28 SSSSEREEEEEChapter 7. Bacloward Stochastic Differential Equations 1, Ietroduction 2 Linear Hasward Stocbate Dilrenial Equations 8, Noaliear Backward Stochastle Dieta! Pqsations 1" BSDEs in Gite detente durin: Method of contraction Mapp 142, BSDEs in random dartions: Method of continatlon 4. Feynman Kio Type Formulae {LU Ropresntation va SDE {12 Roprsmntation vin BSDES ‘5, Foard Baekward Seciste Diferctial Paations 1, General formoltin and onsale 52. The fourstep scheme, ure derivation 153. Several soabe claws of PESDES. 6. Option Pricing Probes ‘61. European tal options ad ie Blac Scholes formu 2. Other options, 1. isorial Remact References. Index 381 ‘3 Notation “Tho following notation is ruetly dn te bok. edieraional teal Buelidean space. me at ofall (nm) tel mate — the wt fal (nn) ymmetie matress the st of al (0) nonnegative defsive mations ‘55 — tho set ofall nn) postive dfinte atric (A) — the trace of the square malas . 27 — the tranpoe of the rector (o mates) 2 {Ge} inner prot in sme Hilbert spe, Q the st of al rational aumbors 1N — the set of maar umber [| — Lebongue measure ofthe st N, 2 — Deine w be ce belo). 1, — teat rin the ata: iy ("A ot Smax(y.0}, — min {9,0}. avbSmax(ad), «Ad 2min{ FP tet ofal meat — te ents {40,740} thet of al tino tons 91.7 Xf. RY)— thet ofl enim tons 8) ~ GU) tea a om oud, ois tno OTR) — tho Lb men com 9:87} RO such that [p(t < 96 (B€ [20 E=7R?) tet oui Donel meni ios er (0.7.8) — pay spe ilo — thes (17. (FloP) Skt prota ce 2) ~ she all ened ya en en o(@) 26-"(F) ~ the o-fekd generated by the random variable Od) the let oi sng the caw A VeFe20U, Fa NaF AM, Fo[P= Pof-! — the probability manure induced by the random Assumption Index able EX — the expectation of the random variable X. Con(X YEE BX\Y BY), Var XA Cor(X, 4X). mass Bip cone coma grad @ as TB(QSR) — te et of e-eled Goebel (or ir “Couch the BAP oe (ve Dae) a ea) — thse of bounded val enable {hy 10a, 208 coon write {ba<03) ab 1500.78") — te eo al (7) aden alc proves (bay 28 1X() such that J [X() Pat < oo. oy 3s 1F0.TR) — ea Pete Wl sna in eee (FP) 373 g(a;C\o,THR)) — tem of (F}pondated RC mle 2 comin pee XC) ook tet {ron pen NCP <0 Pe ho) {ay "a0 (800.7) — the wt ef earn oti (emp on ‘A2.0,7) — the set of square integrable costsuous martingals ae ‘esto. ~ thee of squaring eal tigen ew ‘Mem 0.7] — the ot of mune narble contin aa sr 3) 319 W'0,7)20((0,75 8"), W" SC ((0,20):R"). (RC) 49 (C,—theon of Bor etn ie W" (sy 0) (© — the st of Boel eylndes in W" (siy-qsay" 177,208 Wri0, T)A{c(-Ae) |G EW"O,T}}, t€ (0,71. oe = went teh aa Bee (WO.T) EA. B.(W",7), ¢€ 1.7). (SEI)-(SEA) 69 wr2tcean |gewr), ¢20. ms Bw") Saw), 120. Ba(W7)EN, BW"), (20. AU) ~ the set ofall (8o(W" 0.7) sr prograsively measurable process: QT] x WH 7] —U. AM(U) ~ the et fal (Bs (WW) ne-progresivly measurable process): [Qas) x W" =U Vp, — the a of al measurable functions [7] +. U.T) ~ the set ofall (Fisraapted procames wT] x 9-40. Vas0.T] ~ the st of determinate sdmisible control U0. — the ot of (thas) strong edie controle eI ecto es ee eeProblem Index Problem (D) i, 19,158, Problem (D,,) 180,28 Proler ("115,178 Problem (Sa) 177, 288 Problem (SC) 48 Problem (SL) 68 Problem ($8) 63 Problem (WS) 6 Problem (DC) 76 Problem (DT) 76 Problem (DLQ) 285, Problem ($1Q) 01 Chapter 1 Basic Stochastic Calculus Stochastic clus reves ss fandarental tool throughout this book. This ‘Gaptr i moant fo boa convenient "User's Guide” on sacha caeas {ert inthe sutooquert chapter. Specifically collects the definitions fed rv in sachaste cael seatered around in the Merature that {ip tat to stochastic control I alo nies termieology and notation (obich may flr in dflerens papers/books) that er tobe ued in ate Copter Prot of the rena pesated inthis chapter are citer given {eh ee case when we think tthe proofs impertat in understand Ing the subesert material and/or when there is no immediate reference tole) or ose refered to andard sad easly accesible Boks. Know (lgeele readers may ship this chapter or rar aa quik efeencn 1, Probability {a this section, some introductory probability wil be bre reviewed. The reader re anure! to have bas nowiedge of ral analysis 11. Probability spaces aefinition 1.1. Let ast 01 be nonampty, and let FC 2 (2° is the et (fal pues inf) called clay, bo onempty. We call @aranumifABes > ANBEF, (0) « dsystom it ner, ABER, ACB + B\ACH MEF ATAGH 12 > ACF, (i) ao-peieie ner, ABeF + B\ACH Ach inten @ Uaer 5 and are both ofa 9 and @& F, then Gi cal 820 rfl of FN any to ano thet Finn onl if ane only It i oth {Reystem and a system, in what follows for any cass A 2°, we et 2(A) be the smal e-ldeanaining A, called the o-feld generate by aa ‘Chapter, Base Stacie Calan “The following ros lad & monotone class ore Vemma 1.2. Let ACF C2". Suppose A isa nyse and Fi 9 Xeyntem. Then (4) CF Prof ae B2(\(2A|gwaramen fF. “Then inthe salt Ayo containing A. Set #2 (ned |vAc a Af wed} C6. Cealy, Fig ang Aaytem, ad since Aisa ways, ACF. Ths, we ‘Now, kun define F2(Be8|vAcd, awed} ce Again, Fina Leyton, and by G = Fame as ACF Heme, § =F ‘Sinn ay 4, Be Greig Be F, weave ACB eG. This eps int jw a age Pere, od (whieh conti A) Then (A) SG EF a Let (Fa) be a uly folsom 2. Define an Vr.2oa od (12) AF*1 Fu 1s cay to show that Fy and AF re both o-els and that they are the smallest fed containing all nad the largst ofl contained in all Fa, respectively Let 9 he a nonempty set and Fa oil on 8. Then (0) i alld ‘measurable space A pot © called a sample. A map BF — 03] {sealed polity measure on (9,2) if Pie)=0, PE)= 1, MEF AMAR MLB AR a» (Qa) = Spe. “The tile (0,,P) cll a probability apace. Any Ae Fis called an ‘ren and P(A) represents the prababy ofthe event A. Two evens A lint B are sid to be sndgendent PCA 8) = PCAYP(B). An event A {ssid to be independent of aed FA se adependent of any BF. as) 2. Probaiy 4 ‘Two ovis F and Gare sa tobe sependent any event AE Fis independent of ‘ran event ach that P(A) = 1 dhe wo may lieratinely denote this by aa A belie, Pas ‘Aset/evenh A € 7 called» P-nllset/event if P(A) = 0. A probability pace (0-7 P) is si oe complete or any Peal st Ae Fon hak Bee whenever A A (nu necessary that Bis al a Pol st) ‘We present spe example below. Example 1.3, Let 1 [01], F the wt ofall Lebesgue measurable sts in Bett and P the Lsheque tense on 1). Then one can show that (02,8) ieomploe. Lers():f1-= R hex cominous funtion and define he ovet A= se (u) 20}. The probability af this eve i PIA) =f, coleonen ? For any given probability space (9,F,P), we deine (3) N=(BCA| 34eF, PA)=0, BCA) and #8 2VA Thon fr any A Fern A,B F sch has PCD) = Daal AA By nth case, we dene P(A) = P(A). This xen P oF Char, (0,F,P) nu complete probabity sac Any probity Sou canbe ta compet bythe abe aoqmentation procedure nt Seon we bl sue hat any grobabity sce (27,0) complete Tat (0,7) el (7) e no meamuale spaces end J :01— bo ‘tap. Tho nap f maid o be F/ menvreleo gy ecb PG) e Fn pte (62 7) = (BUT) te ad Co £0 Smear righ bbw for the defo BA) Definition 14. We ta the folowing dino {0A ensure pce (9,5) salto be Bore amergie to ante ‘Rene space (277) the exe Deaton [1 ach {hat bth fan fe meme (0) 11 opel pc, the he peti cng al pen ets of wea he orl devoted by BC) (a) Aspaabe complete merc pce cio a Poi (he) A enable pce (OF) ald oe sonar if i Dorel ‘Boric to on ofthe allowing” ((1n) (Ton) (NECN), a (00), where (18) 80,2. NEL nh MELOY = (oe tonearn) es 0.1) ws tbe dure ool on) a I Sad the pac toolegy on M, espe(9) A prabity space (0, FP) is sido be standard iti complete, ted (0,7) ea andar momar space (7) A eaaarable space (0,7) is sao be counabiy determined (or sm iy, F countably detensned) there exits a countable wet Fo CF rk that any to probability meses tha gre on mt cide (on. Proposition 1.5. Let bo a Posh space and F = BM). Then (0) (9,7) te standard, and is countably determined (i) oe any EF, be FF = AI EA(M AIA € FY. Then 01.) andar (i) (0,2) i Bore! bomorphie to (RR) Fis uncomntable See Parthasarathy (1, pp. 189-124) and Ta Wataabe [1p 19] fr 1 proof and descriptions. 1.2, Random variables Let (0,5) and (0,7) be cwo mearurable spaces and X 2 —» an Fipseeeabe ap. We cll Xan F/7"-random variable, oc simply ‘anda nara there wold be no canfsion Te sealed an F-randon ‘orale whan (67,7) = (H", BUR). Note that the notion of random Table defined without probability measures. For a random variable Hr XI) len mborSeld of F, which eal theo: fld [pert by, denon by o(X)- This sh alles fil in under which N Simemsurable Also, if (Xo, 9 € 0} Sa family of andor rarablos From 911067 then we denote by a8, 060)2\ X51, ‘he sels subrafeldof uncer which all Xy (9 € @) are measurable Ti X,¥ : 010 be wo random variables end weld on 9. Then 1X isa tobe independent of G(X) i independent of G ae Xs ad to be independent of¥ if X) and o(¥) ae independ. "Now we look at some measurably properties for random variabes. “The flog eli sly felted to Lena 12 emma 16. Lat A te a raymem on Lat W be a nar space of faetions fom 110 sch the rem hem, VAed eM OST, elefate + pCR 06) ‘Then 1 contain ala) mesurable functor 9 to. Proof Set (Aca| Wen, 1. Prot . “Thon F sa Xeystem containing A, Thus by Lemma 12, (A) F: "Now, for any o( Asura fueton 00> we ee Yet he sseercuein e tes, € H and 0S yet ot. Hence, by our wsumption, @* € W. Similar ¢= HC This, © 1, proving our eoncison, a "Tho following esl gv represortation of one random erable in terms of another, under some measurably conditions ‘Theorem 1.7. Lot (0,7) and (9.F) be two measurable spaces, and lt (id) be a Polish spec. Let € 12+ 90 and g #11» U bo to random ‘arial. ‘Then y 8 o(€}- measur, an eMBUN SE, it and only if tere exits & measurebie map: 0 + such that os) He) =e), Wen Proof We neo only to prove the necesity. Fist, we assume that U = For this cae, ot 1209) | 0:68 +, eeaturable). “Then His aia space, and eH. Alo, if A.C o(6) = 107), then for me Be F', al) = ful €()) € He Now, spose my: smeaurable and (6) € Asch that 0 < (€(3) TCU, whe i fine Se A= (EO | supm(e!) 0, then we sy hat X has {normal ditrution (noted by N(A.C)) with paranater (2 C). (Later ave ail tr hat Qos the man and C i te tovrianae matrix ofthe Stra dsrtin) We alo cll N(,C) the Gevasian distribution and 1X Gasssion. ‘We pate out that to havea partiela type of random varia the ‘undrvingpecebity spa (07) ha to have certain partclar proper: Meer Scampi if afte or courtble set hen (0) nt Feb hough to acomindate a normal distribution, 1. Poti , Asequnce of random variables (X,) called id: if they re indepen on and ienicalydacrbuted (Leth datebuton Functions eons). ied G0) enact un NEF ier eos wy [xeare= [sary ex ‘Then wesay that X hasthe mean BX. Wo lso call BX the (mathemati) ‘Byeraton of X_ Note that a given random warble doce rot necealy fare a mean. We ray alto dfn the mean ore a set Ae F 2 f xan [20re Let LL(0;H") 2 L1(0,F,PeR™) bo the set fall random vrablee X90 tho [x] as eacans (ovr the whele space). This Banach spoce with te norm un mxte fxcnarey= fare (us) BX BUX), oat, let 9 R" — Rt be a Bore memurable funtion, Then, fr any andor vatable X7A1—+ BE", g(X) 11> slow random variable Porter, (X) has a mean, ten cay Bacay f sixtonaried= f_oletrte) “The cove g(2) = le (p> 1) ie of patel interest. fandom variable 2X Te sch thas [XV eLF(OE:R), then (119) xy [ixcirarrey Fe ccna Severe) pe oa las wie Aeeea seta irkpeer pemrnionert am xp =(swrare)™” In parila, fp = 2, thon £4.(0 product 0") a bert spice with the ane Aa) game Lxeren@er=Aa™n ‘Aloo, let_L#(0:R™)2L(0,F,P;R™) be the st of all essentially Nall ere rhe Nt Cle Tras SET Mc we a014(04R) for any p > 4 > 1, ts paelar, (0: RI) ¢ LOR) ‘Thar, ramp X,Y © C315), EX and BY ent and che lowing is a2) (oe X.¥) 2 BLOX ~ BXY(Y — BY], whichis eal the covariance ofthe ?-andom wrabh X and Ya partic, (028) Vex S600 (X, x) = BUX BXYX- EX] ‘elle the sorans ofthe 7-radom variable X, Avan example, fX Ganssian withthe dstetbaton N(Q,C), then Beak Wer o Feat fey need i i (a ny TPL aaa rae aan orto ee = fe) ee ations ent a0) veer" (13s) ger" 1.3. Conditional expectation Let X € L}(ORR™) and lo G be a sudo eld of F. Define a funtion G+ Ras fons: way 2 Bx a) = f x(a) “Then jc 4 vector-valued measure on G with «bounded loll sarition (126) vace. [x(a = 2m, Morse lly cons wih rapt Pl rin stent y te Rao Nj hore rts evita we) = Ea, g.Plg Rall he Reon lym cre Sth apt oe hat cam ay= f onete= [seis vse ere, note that Pisa extension of Pig. Te funtion fi called the con “ditional etalon af X given G, denoted by E(X|9). Using this notation, swe may rewrite (127) a follows cm fxqaey= [econo ves FT patty ® 29) Indeed, we can alternatively deine BUX|G) to be the wique Q-andom srl sats (1.2). Let us ealet some bec proper ofthe conditional expectation, BUX; A)=E(ECX|a).a). YEG: Propenition 1.8. Le G be mba oF. Then () Map 0}: E05 40") E05R") ar ad bone (Baga, Pos, voeR Gi) HRY C13(0:R) wd X> ¥, how 130) B(X|g) > BY|g), Pas partial, (3X20 Pas + BUxIg)>0, Paw Ww) Lee X © EON), Ye LYOR™) and Ze LOH) with AZT YZ" ELKO). Then wm myZ"\o) Yeo)", Pas 1a parr, E(B IO2") = XIE. wo {onaen i (0) A random variable X independent of Gf and only ior amy orl ‘measurable fneton J such that EJ(X) ests it holds (39) BUS pric, IF ts Independent of 6, then B(X|@) = EX, Pas (i) Let, C0) CF Then (135) BECK GHA) = BIEL |e) Io) ~ BLA) Pas (i) Jensen's incguaiy) Let X 6 E5(04 RO) and: RU” — R bea cone Tieton auch that g(X) € LGR). Then (138) o(BCX|O)) < BEG), In particular, fr any »> 1, proved tat BX|* exis, we have aan) [Bex|g)?" < BUxPIg), Pas. Pas Proof ofthe above rele are straghorward by the deinitions0 Chapter 1. Dai chat Caeuie [Neat we consider the situation ineleing tm random variable. Lat X.€ LSE) and €: (M,F-P) ~ (SB) be two radon vale ‘Tuen €21B) i osuvoeld of Thus wo may define BCX) the ‘onions! expeeation of X given €-"(8), On the other band, we may treat thisin a ferent as. Define (compare with (1.26). en oof, xe tint esate ener (6, tsk on Tigers mane bfse', Weer es wrens elite a9) Bux) ytd reanses “Te aoe ie clled the conditional expectation of X gen € = 2. Thus JSR” ie fmeion such that (noting (1.28) and (1.38) Lg BE-saner [0 narce) a) ~ [emu [xo ( PRICCONOMP(, YE Conseavent, (at) BXIEMENO) = BRIE = CY, PlengyweR Nxt me tara tothe conditional protabiiy. For a suba-feld Gof sine aa Pilg) a\9), VAER whichis calle the conditional probabity of (be even) given (the com “ion) G: Note eatin gene, we ave P(eig)=0, — Pin\g) cay Ye(Kaje)-Seralon ely VAeF, mutual dat For any sv A 3, P(AlO() i tid ony for Pn. € O. Ts fora gens €0, P(0)(o) knot necemariy a probaly mene on F. Homover, we hve the foiowing re Pleas, Proposition 1.9. Lt (9 FP) bo standard probably spoce and G be f oub-told of F. Then the Blowing ht (0) There exists « mop p: x F > (ly called a repular conditional rout given G sc that la.) a probabty mace on (0) Ta any we, A) Grmeasurale for any AC F, std (144) BUH oie) = PLAIGY(e) = le,4}, Plpaswen, VAEF. “Morvoer, the above p is ungue in the folowing sone: fy another ‘regular convo probability given Geb there exists 8 P-nul st NieG much tht foray wf 0, (as) plas) =p, Ay AEE: (Let HCG bem countably devoid subavfeld and ot ) be the ‘gular candisnal probably given G- Then hore xt a P-ml et NeG auch that ramp @N, (146) plod) = alu), YAN. In pticuar, 1 (94) ~ (S,8) fa G/B-random variable and B is ‘countably determined with (2) € B for alla €S, then (apes e) = 09H) Paswen. For the conditional expctation (| ‘he flng parallel result, Proposition 1.10. Lot (0,F,P) be a standard probability space and (S:B) a tewsurable space. Let (0,7) — (SB) be a random variable snd Pe=P og the ndveed probability measure oa (8,8) (@) Then there ents map B: SF ~ R, called rgular conditional probbity given € = 2y such thee fl) 6a probably measure on E0°F) forany 2 € 5,9 0A) i Bmeaeurable or any A F, and ) of X even ua) PUNCH) = [Renin Her Bes Consoquenty, for any K€ LY(O:R), (ue) ale=s)= [oweaey Peanzes os (eA) = (i) Further iS, sao standard, then cher exits a Pe-mllact WB cht fr aay 2 1, sy) Fie. "(B))=Iale). WEB, Ale =2), Peae 2 eS, VES.” (Chaper. Base tocharte Caesar and in particular, (52) Ree) or proofs of Propositions 19 aed 1.10, se Parthasarathy (1, pp. 145 130, ‘We now give « ration betwen 9°) and fi). Take Ae F and Be B. Using (14 (ith @=€-1(8) and (148), oe hat Lacy MAP) = fg BUAIE NBDE) [risa =a) os , = [pevnaeoene = fg ner om (5) WA =REW.A), Ply gy AWM VALS, From now on i this bole we wil ently P| 3) with fe) and P(|€ = 2) with lx). In other words, provided that (0, FP) ie stan dar, we alway let P(- |) and P| ~ 2) be the cemerponding euler ‘ondtonal probable. In prtcaa, they are well-done foreach sad ‘very sarplew € ‘To conc tis subsction, we supply seul fr Ite se Terma 1.14. Let § (0,5) ~ (R'B(R) be a random variable, ad Xe LGR"), IE(Q(X) = 0 for any 9 CHM), where G(R) ithe ‘et ofall bounded continuous fnctons rom Ro By then we mast hare BUX) ~0, VAC 9G. css) AMR oy) * (oa) ~ 2 Sab < 40, x abo (21.2.0. Tea clear chat Aisa s-stom and 7s lsese space. Moreover, 1 € H, and if € with O'< gi T ey whore ge ate, thon Lem 16 ies {2 € On the other hand, for any A= €-1(B) © A with B= (ony) » ona) x=" (aut), 8 standard diel contruction shows tha hase Fert 3 fs-a sequence (51) © Cull!) ch that (2) na) 4 + 90, Ye € RE ‘Therlor, eX) = Rca) ~ [gentoo a [enxonr = ig Favor 0 ‘This shows that Za €%. Then applying Lemma 0 yields that 7 contains ‘il o(A) = o(€)-mrenrabl finetions from 9 9 R, proving (138). Propesition 1.12. Let 6: (.F) -+ (R,BR™)) be sone of random variables (¢~ 1,2...) Let G2V, 06) and X € 13(0:R". ‘han E(X'G) ~ 0 fad ony i Bay 96) X)~ O fr any and any FECT), where N= Sm ‘Proof The “only i parti clea. Fur the “i pat, deine a, 48s. FBales “Then it is lar that G = of). Set Forany Ac A, ne have A€ 7 forsone . By the wsumption and Lerma Lil. © %. Moro, € Me with O< 9, Te, where fie, then the iéwy lemma implies that c H. Hance by Lema 1.6 7 conta al (A) = G-meairae fenton, which completes the poo a 2p: (0,7) + (R,B)|p measurable, E(OX) 1.4. Convergence of probabilities ‘Te prove sme existence es in stochastic analysand stochaste con tty, inevitably kvolvesconvertene of certain probabilities. We uma. ze in ths subsaction come important rests concen the convergence of probability enor. Let (Ud) be « sparse metre space and B(U) the Bore o-eld Denote by P(U) the eof all proabity mearars om the measurable sce (0,510) Definition 1.18. A soquence {P,) © PIU) iss tobe weakly contergent woPe PW) iffor any FEC), ig [oer 0 [rons Proposition 1.14. Ther ica metic on P(U) such that P, > P weakiy Isequralet to (P,P) +0 asi 38 Definition 1.15. A set A PU) isi tobe(0 rately compact any sequence (P,) & A contains a weakly conver, fet suber; (6) compact i is rlatively compet and (ii) ng for aay © > 0 there is expect sot K SU such that Infes PUK) 2 1. Proposition 16. Lee AC PW). Then (0) A is rltivey compact i Bs ght (Gi) WU) comple (i, i paish space), chow Ni ght iit is latively compact Seo Theda Watanabe [1, pp. 68] for proofs of Propsiins 1.14 and Lie Corollary 1.17. If (U4) ie compact, then any A.C PU) ie tght and relay compact. In particle, PU) compat, ‘The proof straightforward by DeBaition 118 and Proposition 1.16 Seo also Parthasarathy [lp 45, Theorem 6.4) Recall that (Xs (0,F,P) — (Uj) «random variable, then Py € (U) devotes tho prbebcy induc by X (one (1.9). We say that family of random varales Xz" (0.7,P) ~ (Ura) is Wt i {P,) 6 ie Definition 1218. Let X; + (04 Fp Py) —* Ws) = Yodo and X (LEE) (Usd) be randor wasabi, We uy that X; cmnergen to X fm low if Py, Py wably a6 20 Definition 1.19. Let XX £ (FP) (Uy = 125. be eam arial We'sy that X, converges to X amas ure if Bg AXA)=0, Pas, so that X;comerges Xin poi for any€> 0, i Pw), X)) >) ei not if to ely that for sequence of rand variables, limos surely cocvergence + convergence in probably aun, convergence in aw “The following rel a vor of revere ofthe above implications ‘Theorem 1.20, Let (Ud) bea Polish space and (Py ~ 12h--P) © PUL) be sch that Py converges to P weakly. Thon on somo probity space (P,P) there are random variables X,.X> (Q,F) — (U,B(U)), : ch that @) Bo2By 12. and P= Py. WW) XX asi oo, Ban “This theorem i de to Soro. Se Bling [1] for a prot Fa setae proces 8 2, Stochastle Process In this ction wo real some resus on tochastic pres. 2.1. Goneral considerations Definition 2.1. Let Thea nonempty indexset and (0, ,P) a probability Space, A famiy (X(0)€ © Tp of aor variates fom (0,F,B) to RO {ed slochastic press, Fr any w/e the map (04) ald a ‘ome ph In what follows, we let Z ~ [0,7] with P > 0, oF T= (0,00). We shall inercbangenbly tse (X(2) 66 7}, XC), X(), oF even X to dnote a ‘Hochartic prom orany given stacastle proces X'(),¢ © , weean define the following: Fula) SPX) So), SPEX(4) SeuXlt) S20) Fanbened ey BP EX) Sti Kl) Sh Fics lie Here, € 7,2, € R, aed X(,) <2 stands for components inequal tis The functions defied i (21) are ealled the fnte-dimenstona dit Udon of the proces X(e)- This fly of functions satis the flowing pert (6) Somme 1 (4-6) 8 permutation of (2-9) then 2) Footy a8) = Fat Bt oe) (©) Compatibiiye For ali< 5, 2) Facttinsey ttn 8840040 400) = Rhyne ‘Tham any sachs proces adie eymmetrc and compatible Site Aersinal distibutions. Conversely, sven fay of functions, denoted by, eombting of Factions yy, (2au2)) J > band satin the ‘ae comin (a) nd (bf nara to ack whether no can Bd { tochatie ymocst (X(Q)yt © Z) howe Blte-dmersionl dso teineie with Fie following rm of Kolagoeoy gies positive answer to this question Theorem 2:2. Let F = (Fou (sie--2)) 5 > Ube a family of finetenssattying the symmetry ant eempatiaity conditions. Then there frie probability spare (0.7, ) and stochastic process X(#) whose Finivetineninal dstebutions coincide wih