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:: Stochastic Integration & Ito's Lemma ::

This article combines the previous article on the subject to Ito's Lemma.

We have seen that:

By Ito's Lemma we have that:

Therefore if we set thus then on rearranging we have:

e.g.  Show that

set thus .

e.g.  Show that

set thus .

Consider the linear multiplicative noise process :

This process is known as multiplicative white noise since the noise term dX multiples S. This can be solved using Ito's formula:

We can now integrate directly:

Written by Raffaello Vardavas.

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