Geometric Brownian motion is a martingale

brownian motionmartingalesprobability theory

Why is the geometric Brownian motion, given by

$$ \alpha \exp \left( \sigma W_t – \frac{\sigma^2}{2} t \right)$$

a martingale?

I just have problems to show the point: $\mathbb{E} [X_t \mid \mathcal{F}_s] = X_s \ \ \ \ \mathbb{P}$-a.s for all $t > s$.

Best Answer

Hint

Using the fact that $W_t-W_s$ is independent of $\mathcal F_s$ yields

$$\mathbb E[\alpha e^{\sigma W_t-\sigma ^2t/2}\mid \mathcal F_s]=\mathbb E[e^{\sigma (W_t-W_s)}]e^{\alpha W_s+\sigma ^2t/2}.$$