Single jump processes and strict local martingales

Abstract

Many results in stochastic analysis and mathematical finance involve local martingales. However, specific examples of strict local martingales are rare and analytically often rather unhandy. We study local martingales that follow a given deterministic function up to a random time γ at which they jump and stay constant afterwards. The (local) martingale properties of these single jump local martingales are characterised in terms of conditions on the input parameters. This classification allows an easy construction of strict local martingales, uniformly integrable martingales that are not in H1, etc. As an application, we provide a construction of a (uniformly integrable) martingale M and a bounded (deterministic) integrand H such that the stochastic integral H•M is a strict local martingale