# Finding the twice differentiable function in Itos Lemma

(I am an undergrad in Econ and new to this forum, so I'm sorry if this will be easy for you guys)

Im currently struggling with Stochastic Calculus, resp. Itô's Lemma. I understand that once we have an Itô Process $$X_t$$ that satisfies the Stochastic Differential Equation, we have to find a twice differentiable function. I posted an example, and wanted to ask if anyone knows how to get the:

$$Z_t := f(t, W_t) := t \cdot W_t$$

Thanks In advance, any form of help is very appreciated

• Welcome to Math.SE! Please format your math using MathJax. Additionally, people will be more likely to help you if you show what you have tried. – csch2 Apr 11 at 13:22
• $f(t,w)=tw$ is twice differentiable. It is not too farfetched that the integral $\int W_tdt$ or $\int tdW_t$ results in one term $tW_t$ plus others according to the Ito formula. – LutzL Apr 11 at 14:11

## 1 Answer

Itô's formula states that

$$f(t,W_t)-f(0,W_0) = \int_0^t \partial_x f(s,W_s) \, dW_s + \int_0^t \left( \frac{1}{2} \partial_x^2 f(s,W_s) + \frac{\partial}{\partial s} f(s,W_s) \right) \, ds \tag{1}$$

for any (nice) function $$f$$. Equivalently,

$$\int_0^t \partial_x f(s,W_s) \, dW_s = f(t,W_t)- f(0,W_0) - \int_0^t \left( \frac{1}{2} \partial_x^2 f(s,W_s) + \frac{\partial}{\partial s} f(s,W_s) \right) \, ds. \tag{2}$$

Now let's consider the stochastic integral $$\int_0^t s \, dW_s$$. If we can find a function $$f$$ such that

$$\partial_x f(s,x) = s \tag{3}$$

then the left-hand side of $$(2)$$ is nothing but $$\int_0^t s \, dW_s$$, i.e. exactly the stochastic integral which we are looking for. Integrating the equation $$(3)$$ with respect to $$x$$ yields

$$f(s,x) = sx + c$$

for some constant $$c$$; let's choose $$c:=0$$. Then $$\partial_x^2 f(s,x) = 0 \qquad \partial_s f(s,x) = x,$$ and therefore (2) gives $$\int_0^t s \, dW_s = t W_t - \int_0^t W_s \, ds.$$

See e.g. this question and this question for further examples.