Stat/219 Math 136 - Stochastic Processes Notes on Section 4.1.

Independence, Uncorrelated-ness, and Something in Between

Suppose (X, Y ) is a random vector dened on some probability space (, F, IP) with IE(X 2 ) < , IE(Y 2 ) < . The following implications are true. IE(X|Y ) = IE(X) X and Y are independent IE(Y |X) = IE(Y ) For a proof of the rst statements on the left above, assume X and Y are independent. Then the constant IE(X) is measurable with respect to (Y ). Since X and (Y ) are independent, for any G (Y ) we have IE(X)dIP = IE(X)IE(IG ) = IE(XIG ) by independence
G

X and Y are uncorrelated (1A)

=
G

XdIP

Thus IE(X|Y ) = IE(X). Similarly we have IE(Y |X) = IE(Y ). Next we prove the statements on the right side of (1A). Suppose that IE(Y |X) = IE(Y ). Using the tower property and then taking out what is known, we have IE(XY ) = IE(IE(XY |X)) = IE(X(IE(Y |X)) = IE(X)IE(Y ). Thus X and Y are uncorrelated. Similarly, IE(X|Y ) = IE(X) implies that X and Y are uncorrelated. However, the converse implications are not true in general. Counterexample 1: X and Y uncorrelated does not imply IE(X|Y ) = IE(X) Let = {1, 0, 1} with P({}) = 1/3 for each . Let Y () = and X() = I{0} (). Then XY = 0 so IE(XY ) = 0. Also, IE(Y ) = 0, and so IE(XY ) = 0 = IE(X)IE(Y ); that is, X and Y are uncorrelated. However, since X is measurable with respect to (Y ) we have IE(X|Y ) = X which is never equal to IE(X) = 1/3. Counterexample 2: IE(X|Y ) = IE(X) does not imply that X and Y are independent Consider the independent random variables X and S of Exercise 3.2.12. Then IE(SX|X) = XIE(S|X) = XIE(S) = 0. However, as shown in Exercise 3.2.12, X and SX are not independent.

Counterexample 3: IE(X|Y ) = IE(X) does not imply that IE(Y |X) = IE(Y ) Let = {1, 0, 1} with IP({}) = 1/3 for . Consider Y () = and X() = I{0} (). Then IE(Y ) = 0 and IE(Y |X) = 0 I{0} () + (1 1/2 + 1 1/2)I{1,1} () = 0, so IE(Y |X) = IE(Y ). But IE(X) = IP({0}) = 1/3 and since X is (Y )-measurable IE(X|Y ) = X = I{0} (), so for each , IE(X|Y )() = IE(X).

1.1

Relationships in terms of expected values

It is instructive to look at these relationships in (1A) in terms of equivalent statements about expectations of functions of the random variables: X and Y are independent IE[g(X)h(Y )] = IE[g(X)]IE[h(Y )] for all bounded, measurable g and h IE(X|Y ) = IE(X) IE[Xh(Y )] = IE[X]IE[h(Y )] for all bounded, measurable h X and Y are uncorrelated IE[XY ] = IE[X]IE[Y ] The rst line is due to Proposition 1.4.41. The second line is due to the denition of conditional expectation in the L2 case; see Denition 2.1.3 and equation (2.1.2). In case X is square integrable it is possible to replace bounded g, h in the above statements with g, h that satisfy IE[|g(X)|2 ] < , IE[|h(Y )|2 ] < . From the right side of the lines above, it should be clear why independence is the strongest statement while uncorrelatedness is the weakest, and the second line gives a property strictly in between. (It should also be apparent why there is an asymmetry in the in between property, as witnessed in Counterexample 3 above.)

1.2

Equivalence in the case of Gaussian Random Vectors

If (X, Y ) is a Gaussian random vector then these notions are equivalent: X and Y are independent IE(X|Y ) = IE(X) and IE(Y |X) = IE(Y ) X and Y are uncorrelated In order to show this, assume (X, Y ) is a Gaussian random vector and X and Y are uncorrelated. Let 2 X X,Y = (X , Y ) be the mean vector and = be the covariance matrix. Since X and Y are 2 X,Y Y 2 2 2 2 uncorrelated, X,Y = IE[(X X )(Y Y )] = 0. So, (, ) = X 1 + Y 2 for = (1 , 2 ) and we have
2 2 2 2 X,Y (1 , 2 ) = exp[(1/2)(X 1 + Y 2 ) + i(X 1 + Y 2 )] 2 2 2 2 = exp[(1/2)X 1 + iX 1 ] exp[(1/2)Y 2 + iY 2 ] = X (1 )Y (2 )

where the last equality is due to the fact that any individual component of a Gaussian random vector is a Gaussian random variable. Thus, by Proposition 3.2.6 X and Y are independent, and the remaining equivalences then follow from (1A). It is important to recall that the assumption that (X, Y ) is a Gaussian random vector is stronger than just having X and Y be Gaussian random variables. For example see Exercise 3.2.12, in which we showed that SX and X are two uncorrelated Gaussian random variables, but (SX, X) is not a Gaussian random vector.

Applications to Square-Integrable Martingales

2 In this section we consider a stochastic process {Xn } which is square integrable (IE(Xn ) < for all n) and

its canonical ltration {Fn } (Fn = (X0 , . . . , Xn )). Let D0 = X0 and Dn = Xn Xn1 , n = 1, 2, . . . be the associated dierence (or increment) sequence. Using Corollary 1.2.17 we can verify that Fn = (D0 , . . . , Dn ). It is easy to verify that if {Dn } is a sequence of independent random variables with IE(Dn ) = 0 then {(Xn , Fn )} is a martingale. However, independence of {Dn } is not necessary in order for {(Xn , Fn )} to be a martingale, since as long as IE(Dn+1 |Fn ) = 0 for all n = 0, 1, 2, . . . we have IE(Xn+1 |Fn ) = IE(Xn + Dn+1 |Fn ) = Xn + IE(Dn+1 |Fn ) = Xn . Also, if {(Xn , Fn )} is a martingale, we must have IE(Dn+1 |Fn ) = 0. Note that the assumption IE(Dn+1 |Fn ) = 0 is equivalent to assuming that both IE(Dn+1 ) = 0 and IE(Dn+1 |Fn ) = IE(Dn+1 ). (2A)

From Denition 2.1.3 and equation (2.1.2), (2A) is equivalent to: IE[(Dn+1 IE(Dn+1 ))V ] for any square integrable random variable V which is measurable with respect to Fn . Recalling that Fn = (D0 , . . . , Dn ), by Theorem 1.2.14 we have that for any such V there is a Borel measurable function h : IRn+1 IR for which V = h(D0 , . . . , Dn ). Thus we have that (2A) is equivalent to IE[Dn+1 h(D0 , . . . , Dn )] = IE[Dn+1 ]IE[h(D0 , . . . , Dn )] for all measurable h with IE[|h(D0 , . . . , Dn )|2 ] < . Notice that this property is the same as the in between property mentioned in Section 1 above (for the two-dimensional case). We also see that this property is related to the orthogonality property discussed in Section 2.1. This motivates the following denition (Denition 4.1.2): We say that Dn L2 (, F, IP) is an orthogonal sequence if IE[Dn+1 h(D0 , D1 , . . . , Dn )] = IE[Dn+1 ]IE[h(D0 , D1 , . . . , Dn )] for any n = 0, 1, 2, . . . and every Borel function h : IRn+1 IR such that IE[|h(D0 , . . . , Dn )|2 ] < . Summarizing the above yields Proposition 4.1.17: A discrete time stochastic process {Xn } is a martingale for its canonical ltration if and only if has a zero-mean, orthogonal dierence sequence {Dn }.