Questions tagged [brownian-motion]
In mathematics, Brownian motion is described by the Wiener process; a continuous-time stochastic process named in honor of Norbert Wiener.
1
vote
0answers
27 views
Novikov condition for Vasicek process
Suppose that we have a money account $S^{(0)}$ with dynamics
\begin{align}
dS^{(0)}_{t} = r_{t} S^{(0)}_{t}\, dt,
\end{align}
where
\begin{align}
dr_t = a(b-r_t)\, dt + \sigma_{r} \, dW_t^{(0)}.
\...
1
vote
1answer
69 views
Bitcoin dynamics - C++ Simulation
I would like perform a simulation of Bitcoin future prices given a sample of the 4 past years (2014-2018). My problem is that I do not know what model to use! For common stocks I used the geometric ...
5
votes
0answers
69 views
Distribution of portfolio values with constant spending rate
If your portfolio is invested in an asset that follows a geometric Brownian motion, and you withdraw a constant dollar amount at the beginning of each year, is there an approximate analytical ...
0
votes
0answers
43 views
What is needed in Brownian Motion [closed]
What data is needed for Brownian Motion? I’m currently having an dummy firm, and want to simulate stock market using this dummy firm and firm data. How can I proceed this ?
Edit: I have a simulated ...
3
votes
2answers
100 views
Find the brownian motion associated to a linear combination of dependant brownian motions
I have $N$ correlated standard one-dimensional Brownian motions $W_1,\ldots,W_N$ with correlation matrix $\rho$ and I consider the process $Z_t \equiv \sum_{i=1}^N \mu_i (t) W_t$ where the $\mu_i$ are ...
0
votes
0answers
47 views
Brownian motion for modelling future asset values
Assume that an asset price $S$ is given by a Brownian motion. Argue from the definition why it is not possible to predict future values of the asset based on the past values of $S$.
I am not sure ...
1
vote
0answers
47 views
Geometric Brownian Motion with Dividends
I am working on a problem and had a quick question. I understand that for Geometric Brownian Motion we use the formula:
$$X_{t_n} = X_{t_{n-1}} + \mu X_{t_{n-1}} \Delta t + \sigma X_{t_{n-1}} \...
2
votes
0answers
53 views
For an Ito Process, $d\ln{X} \neq \frac{dX}{X}$ and $(d\ln{X})^2 = (\frac{dX}{X})^2$, but $d\ln{X} \neq \pm \frac{dX}{X}$
In normal calculus we can write $d\ln{x} = \frac{dx}{x}$ since there is no quadratic variation to deal with. This isn't true for stochastic processes, and Ito's Lemma is used to calculate $d\ln{X}$. ...
1
vote
1answer
35 views
CDF&density of stock price modeled by standard brownian motion
Assume that the price of the stock follows the model
$S(t) = S(0) exp (
mt −
((σ^2)/2 )
t + σW(t)
)$
, (1)
where W(t) is a standard Brownian motion; σ > 0, S(0) > 0, m are some constants.
Derive the ...
1
vote
1answer
44 views
Expectation and variance of standard brownian motion
Assuming that the price of the stock follows the model
$ S(t) = S(0) exp (
mt −
(σ^2/
2)
t + σW(t)
)
,
$
where W(t) is a standard Brownian motion; σ > 0, S(0) > 0, m are some ...
2
votes
1answer
57 views
If S(t) is geometric Brownian motion, what is the distribution of S(t+h)-S(t)?
Suppose we have a geometric Brownian $S(t)$ which follows a lognormal process. Say
$$
\begin{equation}
dS_t = \mu S_t dt + \sigma S_tdW_t
\end{equation}
$$
My question is what is the distribution of $...
1
vote
2answers
95 views
How to numerically simulate exponential stochastic integral
For example given an integral
$$
\int^t_0 \exp(aW(t'))\,dt', t\in\mathbb R_+
$$
where $W(t')$ is a standard Wiener process.
I've been very confused about stochastic integrals like $\int^t_0 W(t')\,...
4
votes
1answer
135 views
Ito's Lemma for this problem
I'm attempting to prove a lemma from a paper, in the context of optimal contracts.
$r,\rho,\gamma,\alpha,\sigma$ are all known constants.
$dR_t = (\alpha + r)dt + \sigma dZ_t$ where $Z_t$ is a ...
1
vote
1answer
69 views
Correlated stock prices and geometric Brownian motion
I have two uncorrelated stocks which follow geometric Brownian motion, as follows
$$\begin{aligned} dS_a &= \mu_aS_adt + \sigma_aS_adW\\ dS_b &= \mu_bS_bdt + \sigma_bS_b dW \end{aligned}$$
...
1
vote
0answers
100 views
On quadratic covariation
I ran through an equality in a paper I was reading but couldn't check if it is correct.
Let $W^1_t$, $W^2_t$ and $W^3_t$ be three brownian motions, not necessarily independent, is it true that the ...
1
vote
1answer
133 views
Measure of a Brownian motion = normal distribution?
Consider some model where the process increments are normally distributed, e.g. Vasicek:
$$dr(t) = \left(\theta - ar(t)\right)dt + \sigma dW(t).$$
We usually say that $W(t)$ is a Brownian motion ...
3
votes
1answer
128 views
Differential of integral of Wiener process over time
I am trying to compute this quantity:
$\frac{d}{dt}\int_{0}^{t} W_s ds $
Where $W_t$ is a Wiener process. Is there a theorem which tells how this can be computed?
I have tried https://en.wikipedia....
3
votes
1answer
209 views
Why is it more accurate to simulate ln(S) rather than S?
Let's take a process $S$ that satisfies:
\begin{equation}
dS = \mu S dt + \sigma S dz
\end{equation}
with $dz$ a Wiener process, $\sigma$ the volatility of $S$, $\mu$ the expected return of $S$.
From ...
2
votes
1answer
78 views
How to get the probability of exercise call option in Black-Scholes model?
From Black-Scholes model, I'm trying to prove:
$p(S_t>K) = N(d_2)$
No luck yet!
Can anyone suggest a reference showing that how to obtain this equation?
All I get is:
$S_t = S_0e^{ (\mu-0.5 \...
2
votes
1answer
87 views
Dynamical Behavior of Hurst Exponent
I feel that the dynamic of financial market is not really modeled by standard Brownian motion, but fractional Brownian motion or even multifractional Brownian motion.
I have read some references on ...
2
votes
4answers
164 views
Basic book on stochastic calculus, Itô and jump processes and Brownian Motion
I was looking for a good book that explains at beginner-level the basic of stochastic calculus, probability and random variables, Itô and jump processes as well as Brownian Motion.
At university we ...
4
votes
1answer
111 views
Expected payoff at future time
Let $a$, $b$, $c$, and $e$ be constants, $W_1$ and $W_2$ be Brownian motions with correlation $\rho$, and $f(t)$ and $g(t)$ be deterministic functions of time. Let $X$ satisfy $$d(X(t))=(aX(t)+ef(t)g(...
3
votes
1answer
69 views
The conditional mean of a product of standard Brownian motions [closed]
Suppose $\{W_t, t>=0\}$ is a Standard Brownian Motion. How to compute
$ \mathbb{E} \left[ W_2 W_3 \vert W_1 =0 \right]$? We know $ W_2 \vert W_1 = 0 \sim N(0,1)$ and $ W_3 \vert W_1 = 0 \sim N(0,...
1
vote
1answer
72 views
How to calculate mean and volatility parameters for Geometric Brownian motion?
Say I have a time series $S_K$ for monthly asset prices for the last 30 years. I want to run a monte carlo simulation using geometric brownian motion
$$S_t = S_0\exp\left(\left(\mu - \frac{\sigma^2}{...
0
votes
1answer
118 views
negative values in geometric brownian motion
A GBM
$ \frac{dx}{x} = \mu dx + \sigma dW $
solves to
$x_t = x_o e^{(\mu - \sigma^2)t + \sigma W_t}$
From the solution, it is clear that $x_t$ cannot become negative. However, it is not so clear ...
3
votes
1answer
90 views
Limits of integration when applying stochastic Fubini theorem to Brownian motion
I'm looking at the solution below from Quantuple, it's a nice, succinct solution but I'm confused about how the limits of the integrals in the second line come from. Could someone please elaborate on ...
3
votes
2answers
213 views
What is the Brownian motion in the model for the return of a stock price trying to capture?
I have read that in the derivation of the Black-Scholes PDE, we assume that the return of a stock $S$ is given by
$$\frac{dS}{S}=\mu dt+\sigma dB$$
where $\mu$ is the average growth of $S$, $\sigma$ ...
4
votes
0answers
86 views
Reference request for research on the maximum drawdown **ratio** (NOT value)
Let's suppose the asset price process follows a Geometric Brownian motion $S_t \sim GBM(\mu, \sigma),\,t\ge 0$, and define the two process:
$$
\begin{align}
\text{MSF}_t &:= \max_{\tau\in[0,t]} S_\...
3
votes
2answers
46 views
What are the underlying events that the random variables map to the real line in the derivation of the Black-Scholes PDE?
When we first try and set up a model for the evolution of S, the value of the underlying stock, I have seen in a lot of textbooks that they model the evolution by the formula $$\frac{dS_t}{S_t}=\mu dt+...
5
votes
1answer
131 views
Distribution of time integral of Brownian motion squared (where the Brownian motion occurs in square root time)?
Let $I_t = \int_0^t W_{\sqrt{u}}^2du$. What is the distribution of $I$?
If I recall correctly, if the Brownian motion were instead $W_u$, then it would be $I_t \sim N\left(\frac{t^2}{2},\frac{t^4}{3}\...
4
votes
1answer
69 views
Discounted asset price is martingale in BS model
I want to verify that the discounted stock price process $\mathrm{e}^{-r(T-t)}V(S_t,t)$ is a martingale in the BS-model. Using Ito's formula and the BS-PDE I get that
$$
\mathrm{d}\mathrm{e}^{-r(T-t)}...
3
votes
2answers
97 views
Random Walk with normal increments and n time periods why is the increment $\sqrt{(t/n)}$?
Question is basically in the title. I have found several sources stating that $R_i = \sqrt{\frac{t}{n}}$, but I couldn't find the intuition behind taking the square root. And it seems to be crucial ...
0
votes
2answers
120 views
Integral of Wiener process over time
This should hopefully be an easy question to answer, but I am new to Stochastic Calculus and am gapping as to why the following is true, for a brownian motion $W_t$:
$$d(\int W_t dt ) = W_t dt$$
I ...
3
votes
1answer
58 views
Autocovariance of increments of a semimartingale
Say that $X_t$ is an Itō process with
\begin{equation}
dX_t = \mu_t dt + \sigma_t dW_t
\end{equation}
where $\mu_t$ and $\sigma_t$ are adapted processes.
Is it always true that
\begin{equation}
E[...
-1
votes
1answer
97 views
Expectation of the product of two Brownian motions [closed]
Could you please let me know the steps to follow to get to the solution?
1
vote
1answer
75 views
Does GBM stock price model have E[S(t)] unaffected by volatility?
Many an author claims that, if you model stock prices through GBM, $E[S(t)]=e^{\mu t}$, and the expectation is thus not related to volatility.
I keep running around in circles on this one. First ...
3
votes
1answer
133 views
How to calculate the covariance between two stochastic integrals?
How to calculate the covariance between the integral of a Brownian motion at different times:
$$\text{Cov}\left(\int^{t_1}_0\sigma(t)dW_t,\int^{t_2}_0\sigma(t)dW_t\right)\ ?$$
I know the answer is:
$$\...
1
vote
0answers
38 views
Model of asset substitution/risk shifting in continuous time
Consider a firm with cash flows $X_t$, which under a risk-neutral probability measure, follows a geometric brownian motion:
$$dX_t = X_t[(r-\beta)dt + \sigma dZ_t]$$
where $r>0$ is the risk-free ...
1
vote
1answer
103 views
Fractional Brownian motion references
Does anyone know any good references to understand the fractional Brownian motion and its numerical simulation, preferably applied to finance.Thank you.
-1
votes
1answer
66 views
Differential product Correlated processes
I am trying to derive the differential of the product of two processes, but I got stuck. This is what I have until now:
We have the following two stochastic processes:
$dX_t= \mu_t dt +\sigma_t dW_t$...
-2
votes
2answers
65 views
0
votes
1answer
138 views
Theoretical distribution of (geometric) Brownian motion (with drift)
I am working on a simulation study which focuses on both the Brownian motion with drift (1) and the geometric Brownian motion (2). I denote them by $X_t$.
What are the theoretical distributions of ...
3
votes
1answer
153 views
Quadratic variation of an integral of a function of a Brownian motion
I'm asked to find the quadratic variation of the integral
$\int_{0}^{t} W_s^2 ds$.
1
vote
0answers
72 views
Correlated GBM and OU processes
I want to model two different stochastic processes, such that:
$X_t , V_t$ are correlated with coefficient $\rho$. Where:
$\frac{dX_t}{X_t}=\mu_1dt+\sigma_1 dW_{1,t}$ and $dV_t=\theta(\mu_2-V_t)dt+\...
3
votes
1answer
365 views
Calculate drift of Brownian Motion using Euler method
I am working on a project to approximate numerically the solution $X_t$ of a stochastic differential equation (SDE) using the Euler method. I have do to this for the Brownian motion with drift. I am ...
0
votes
2answers
468 views
Integral of Brownian Motion w.r.t Time: what is wrong with this solution? [duplicate]
My question is about a stochastic integral of brownian motion w.r.t time.
Let $W(t)$ the Wiener process (or brownian motion). I want to calculate this:
\begin{eqnarray}
X(t)=\int_{0}^t dt' W(t').
\...
1
vote
0answers
67 views
Brownian bridge with time varying volatility
I have a question to ask about the Brownian bridge for a process with deterministic volatility varying over time.
In other words, we have this dynamic: $dS_t = \sigma_{t} * dW_t$. We want to know the ...
0
votes
1answer
117 views
Asset price simulation under Monte Carlo for option pricing using market data
I am trying to use Monte Carlo to price some exotic options. I have in mind to simulate asset prices under GBM (say S&P prices) using Monte Carlo and price the option accordingly from the payoffs ...
3
votes
1answer
164 views
Conditional Probability - Geometric Brownian Motion
Background
I am trying to find a way to price a variant of a gap option by using closed-end expressions. What makes this option a bit tricky is that it can be exercised at four predetermined dates (t=...
5
votes
2answers
343 views
Does Black Scholes need to assume no arbitrage?
Since Girsanov's theorem guarantees a risk neutral measure for Geometric Brownian motion, by the fundamental theorem of asset pricing there can be no arbitrage. So, why does the model assume no ...
