Can someone please help me with the following text:
For Riemann Integral, the limit of sum of rectangles will be the same regardless of the heights of the rectangles. i.e. The lower and upper integrals are the same.
(This I am familiar).
For stochastic (random) environments, this is not true. Suppose is a function of random variable and we are interested in calculating:
still following...just a definition anyway
---- Eq 1
is generally different from
----Eq 2
are they saying the lower and upper integrals are not necessarily the same?
Proof:
Let W be a martingale. The expectation of the term in Eq 2, conditional on information at time will vanish. This is the case, because by definition, future increments of a martingale will be unrelated to the current information set.
lost here... I thought conditional expectation of the future value is the current value. Why does it vanish?
On the other hand, the same conditional expectation of the term in Eq 1 will in general be non-zero.
Hence, Riemann integrals in stochastic environments fail.