Markovian projections for Itô semimartingales with jumps

Abstract

Given a general Itô semimartingale, its Markovian projection is an Itô process, with Markovian differential characteristics, that matches the one-dimensional marginal laws of the original process. We construct Markovian projections for Itô semimartingales with jumps, whose flows of one-dimensional marginal laws are solutions to non-local Fokker–Planck–Kolmogorov equations (FPKEs). As an application, we show how Markovian projections appear in building calibrated diffusion/jump models with both local and stochastic features.