Past exam of the mathematics course of the University of Cambridge / 2016 / iii / Paper 211 / 5 / a / Solution

Backward induction makes every $U_t$ adapted and integrable: the conditional expectation of an integrable random variable is integrable, and $|\max (a,b)|\le |a|+|b|$. The Snell envelope recursion directly gives $U_t\ge \mathbb{E}[U_{t+1}\mid {\mathcal{F}}_t]$, so $U$ is a supermartingale.

If $Z$ is a submartingale, iterating its defining inequality gives $\mathbb{E}[Z_T\mid {\mathcal{F}}_t]\ge Z_t$. Starting at $U_T=Z_T$ and applying the tower property of conditional expectation backwards showsThis last conditional expectation is a true martingale. The conclusions areIn the second case waiting until $T$ attains the optimal stopping value. It is not generally true that $U_t=Z_t$: that further equality holds when $Z$ itself is a martingale.