Problem
For a differentiable path $g(t)$, the ordinary chain rule gives
$$ f(g(T))-f(g(0))=\int_0^T f'(g(t))\,dg(t). $$Why it fails for Brownian motion
Take
$$ f(x)=\frac12 x^2. $$If the classical chain rule were valid for Brownian motion, then we would get
$$ \frac12 B_T^2=\int_0^T B_t\,dB_t. $$But the right-hand side is an Ito integral, so its expectation is $0$, while
$$ \mathbb E\left[\frac12 B_T^2\right]=\frac T2>0. $$Conclusion
Brownian motion needs a corrected chain rule, and the missing term is exactly what Ito formula provides.
Source Links
- STA447
- Phase 8 Atomic Reading Order
- Phase 8 — Itô’s Formula 与应用
- Previous atom: none
- Next atom: Ito Formula for Brownian Motion