Semimartingale Property and Its Connections to Arbitrage

Abstract

In this paper, we prove the celebrated Bichteler-Dellaccherie Theorem which states that the class of stochastic processes X allowing for a useful integration theory consists precisely of those processes which can be written in the form X = X 0 + M + A , where M 0 = A 0 = 0 , M is a local martingale, and A is of finite variation process. We obtain this decomposition rather direct form an elementary discrete-time Doob-Meyer decomposition. By moving to convex combination we obtain a direct continuous time decomposition, which then yield the desired decomposition. We also obtain a characterization of semi-martingales in terms of a variant no free lunch with vanishing risk.