Quadratic Variation in SDEs.
Let be a stochastic process satisfying:
Shorthand:
where the last integral is a Brownian motion integral, and where are adapted functions. (In class we so far only did the case where and are deterministic).
Let f(t,x) be a twice differentiable deterministic function.
The usual presentation of Ito's lemma is:
The professor offered us this shorthand:
He explained that the notation is to be interpreted as the taking the quadratic variation whenever the algebra would suggest you multiply the differentials. For example, (this last step has its own answer on s.e.) Why is the formal multiplication of (stochastic) differentials interpreted as the quadratic variation?