Questions tagged [wienerprocess]

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2 votes
0 answers
45 views

Feymann Kac pde with correlated process

I have to solve the following PDE: \begin{equation} \begin{cases} \dfrac{\partial F}{\partial t}+\dfrac{1}{2}\dfrac{\partial^2 F}{\partial x^2}+\dfrac{1}{2}\dfrac{\partial^2 F}{\partial y^2}+\dfrac{1}{...
  • 153
2 votes
2 answers
253 views

Calculate value of Integral of Wiener process $\int_{0}^t e^{\lambda u } dZ_u$

I am not quite sure how to solve this integral to be able to do numerical calculations with it. $\lambda$ is a constant, $u$ is time, and $Z_u$ is a wiener process. Can anyone provide some direction ...
  • 131
1 vote
0 answers
65 views

Is this the right way to accelerate my Monte-Carlo Simulation

I am trying to develop a pricer for Call VS Call and I'm using MonteCarlo method to do so because my stocks are correlated between each others. Basically my inputs are ...
  • 21
1 vote
1 answer
266 views

Integral of brownian motion wrt. time over [t;T]

From the post Integral of Brownian motion w.r.t. time we have an argument for $$\int_0^t W_sds \sim N\left(0,\frac{1}{3}t^3\right).$$ However, how does this generalise for the interval $[t;T]$? I.e. ...
  • 359
1 vote
0 answers
120 views

Value of trading strategy

A trading strategy is defined as follows: starting capital $v_0 = 5$ and 1 risky asset holdings $\varphi_t = 3W_t^2-3t$ where $W$ is a Wiener process. The problem is to find the probability of the ...
1 vote
0 answers
50 views

Why the Esscher transform is the right transform for pricing formula?

A Wiener process has infinitely many states of the world at any time step. Does that not mean that there are infinitely many EMM's for any model that uses the Wiener process? But then if there is only ...
  • 409
1 vote
1 answer
58 views

Regression of stochastic integral on Wiener process

This question is a follow-up from the following: conditional expectation of stochastic integral so I won't repeat myself regarding assumptions and notation. Using Brownian bridge approach, we know ...
2 votes
0 answers
83 views

Arbitrage portfolio example

Can you give me a concrete example of a self financing portfolio which gives arbitrage opportunity in the two-dimensional Black-Scholes model? By the two-dimensional Black-Scholes model I mean $$dS_{1}...
2 votes
0 answers
98 views

The distribution of the jump diffusion process

In the Merton jump diffusion model the process of the share price can be expressed as $$S_{t}=S_{0}\cdot\exp\left\{ X_{t}\right\} ,$$ where $$X_{t}=\mu t+\sigma W_{t}+\sum_{i=1}^{N_{t}}Y_{i}.$$ Here $...
10 votes
2 answers
495 views

conditional expectation of stochastic integral

let $M_t$ be the following stochastic integral $$ M_t = \int_0^t \sigma_s dW_s $$ where $\sigma_t$ is a sufficiently regular deterministic function and $W_t$ is a standard Wiener process (that is $...
0 votes
1 answer
142 views

Differentiability of solutions of a stochastic differential equation

I would like to clarify a confusion I have. It is well known that a Wiener process (Brownian motion) is nowhere differentiable. I have no difficulty in understanding that. But I am wondering about the ...
1 vote
0 answers
448 views

CIR model. Is there a closed-form solution or even a good proxy of analytical solution?

Is there a closed-form (analytical) solution for the Cox-Ingersoll-Ross SDE \begin{equation} dr_t=k_r(\theta_r-r_t)dt+\sigma_r\sqrt{r_t}dW_t\tag{1} \end{equation} ? Notice that $\{r_t\}$ is our ...
2 votes
1 answer
350 views

Expectation on a function of Wiener Process

If $W_t$ is a standard Wiener Process, then how should I prove that $E \left[ \int\limits_{0}^{t} \frac{1}{1+W_s^2} dW_s \right] = 0$?
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1 vote
0 answers
43 views

How to expand lognormal approximation of Brownian motion

How can we expand this sum? $\sum_{i=1}^n (e^{rt_i-\frac{1}{2}\sigma^2t_i+\sigma w_{t_i}})^2$ where: $w_{t_i}$ is a standard Brownian motion. If we let $m_t=e^{-\frac{1}{2}\sigma^2t_i+\sigma w_{t_i}}$...
1 vote
1 answer
197 views

Calculation of a process's drift

Let $X_t:=e^{W_t}$ where $W_t$ follows the Wiener process. Calculate the drift. The answer is given as $X_t/2$. My attempt at a solution (which I'm afraid is poor from a mathematical standpoint): I ...
1 vote
1 answer
564 views

What is the difference between standard deviation, volatility and quadratic variation?

What is the difference between standard deviation, volatility and quadratic variation? As I know, volatility is the standard deviation of the log returns, so they are basically the same. (One of ...
1 vote
1 answer
120 views

How to Evaluate Expected Value powered 4 of a Wiener Process?

Since $X(t_j) - X(t_{j-1})$ is Normally distributed with mean zero and variance $t/n$ we have $$ \operatorname{E} [(X(t_j) - X(t_{j-1}))^2 ] = \frac{t}{n} \tag{1}$$ and $$ \operatorname{E} [(X(t_j) - ...
3 votes
2 answers
566 views

Proof that $\exp(aW(t)-0.5a^2t)$ is a martingale

I'm trying to prove that $Z(t)=\exp(aW(t)-0.5a^2t)$ is a martingale where $W(t)$ is a Wiener process and $a$ is a constant. Here is my attempt: $$E[Z(t+s)] = E\left[\exp\left(aW(t+s)-0.5a^2(t+s)\...
  • 587
2 votes
1 answer
103 views

Independence of increments of the stochastic process $\frac{1}{t}\int_0^t u dW_u $

Let $X_t$ be a stochastic process such that $$X_{t} =\frac{1}{t}\int_0^t u dW_u $$ I know that for $$Y_{t} =\int_0^t u dW_u$$ $Y_t-Y_s$ is independent of $Y_s$ where $t>s$. But is this also true ...
3 votes
1 answer
675 views

Probability Density Function of a Wiener Process Minimum

Let $W_t$ be a standard Wiener process. Find the probability density function of $m_T = min_{t\in [0,T ]}W_t$. I know that it is based of the concept of the reflection principle, but I wasn't too ...
  • 281
1 vote
1 answer
199 views

Can anyone explain to how Hull get from stock returns to continuously compounded stock returns?

I'm reading Chapter 13 of Hull's book and am stuck on how he got from stock returns to continuously compounded stock returns. As a recap, he built the generalized Wiener Process, which describes a ...
  • 627
3 votes
1 answer
211 views

Interpretation of IV and its use in stock movement prediction

I would like to validate my understanding of IV as a prediction tool. Black-Scholes model is based on the assumption that rate of return of a stock is a Wiener process: $$ \frac{dS_t}{S_t} =\mu \,...
  • 213
7 votes
1 answer
6k views

Integral of Wiener process w.r.t. time

I have a doubt with regards to the calculation of the below integral- $\int_0^t W_sds$ where $W_s$ is the Wiener Process. This has been solved very ably in the following page. It turns out to be a ...
8 votes
1 answer
236 views

Integral of the OU (Ornstein Uhlenbeck) process conditioned on hitting a threshold value for the first time

Let say I have a zero-mean OU process as follows: $dX_t = -\alpha X_t + dW_t$ The process starts at $x_0 = 0%$ and I'm interested in the event in which the process hits the value $x_{\tau} = a$ for ...
  • 181
0 votes
1 answer
166 views

Two Wiener process under same martingale measure Q

Let $W_1,$ $W_2$ be to Wiener processes under the martingale measure $Q$. What can be said about $dW_1*dW_2$? I know that $$(dW_i)^2=dt$$ but what about the case with two different wiener processes?
-3 votes
2 answers
460 views

Geometric Brownian Motion: Why is the Wiener process multiplied by volatility?

Below is the stochastic differential equation of the Geometric Brownian Motion: $$dS_t = S_t \mu dt + S_t\sigma dW_t$$ My understanding of the Wiener process is that the volatility component of an ...
  • 119
1 vote
0 answers
66 views

Solving for roots of a stochastic pay-off function

I have a pay-off function for a derivative which is defined by the Heaviside difference between $G$ and $B$ shifted by $-F$. To find the value of $V_{t=0}$, I need to find $\tau$ when $\frac{dV}{dt} = ...
2 votes
0 answers
154 views

Expected value of a wiener process on an infinite time horizon with a barrier

Say I have a wiener process with $X(0) = X_0>0$ and the dynamics \begin{equation} dX(t) = \begin{cases} -\mu dt + \sigma X(t) dW(t)^{\mathbb{Q}} & \mathrm{for\ } X(t)>0\\ 0 & \mathrm{...
  • 1,048
1 vote
1 answer
848 views

Matlab implementation for modelling stock price process

I am trying to model the stock's price process. Let's assume volatility and risk-free rate is given. I've come up with the code below to try and model the price process with the geometrical Brownian ...
  • 201
1 vote
1 answer
1k views

Is this process of Brownian motion?

Background Information: The process $W = (W_t:t\geq 0)$ is a $\mathbb{P}$-Brownian motion if and only if i) $W_t$ is continuous, and $W_0 = 0$ ii) the value of $W_t$ is distributed, under $\mathbb{...
  • 708
4 votes
2 answers
450 views

Are two stochastic processes independent if the Wiener processes inside are uncorrelated

Assume there are two stochastic processes: $dx_t = \alpha_1(x_t,t)dt + \beta_1(x_t,t)dW^1_t$ and $dy_t = \alpha_2(y_t,t)dt + \beta_2(y_t,t)dW^2_t$. Does $dW^1_t\times{dW^2_t} = 0$ imply that $\...
  • 41
4 votes
1 answer
277 views

On the reflection of a stochastic integral

Let ${(I_t)}_{t\geq 0}$ be a stochastic integral defined by $$ I_t=\int_{0}^{t}\theta_sdW_t, $$ where $W$ is a standard Brownian motion defined on $(\Omega,\mathcal{F},{(\mathcal{F}_t)}_{t\geq 0},\...
  • 361
2 votes
2 answers
130 views

Bounded Stochastic discrete process

I just came across this stochastic process (link): $dY_t = (a-bY_t)dt + c \sqrt{Y_t(1-Y_t)}dW_t$, where $dW_t$ is a Wiener Process. According to the author under certain conditions this process is ...
  • 6,923
4 votes
1 answer
669 views

Solving a backwards heat equation using stochastic calculus

Given the PDE $$\frac{\partial F}{\partial t} + \frac{1}{2}\sigma^2 \frac{\partial^2 F}{\partial x^2} = 0$$ with condition $F(T,x) = x^2$, one can use the Feynman-Kac formula to arrive at $$F(t,x) =...
  • 831
1 vote
2 answers
132 views

Stochastic process theory question

*S follows a process $dS= mSdt + oSdz$ where m and o are constant. What is the probability followed by $ Y=(Se)^{(r-t)} $. If S follows a process $ dS= k (b-S) dt + oSdz $ where k, b, o are ...
  • 11
2 votes
1 answer
102 views

Can the differential operator be removed to get the mean/variance of an Ito process?

If $X_t$ is an Ito process, such that: $dX_t = \mu(t, X_t)dt + \sigma(t, Xt)dW_t$ where $W_t$ is a standard brownian motion. Then we can say that: $E(dX_t) = \mu(t, X_t)dt$ and that $Var(dX_t) = \...
  • 800
1 vote
1 answer
518 views

Obtaining the drift of a Wiener process formed from a random walk

I'm trying to understand how the equation for Geometric Brownian Motion is formed from a random walk. I'm following the book 'Statistics of Financial Markets' but I'm struggling to follow how the ...
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4 votes
1 answer
269 views

How can I calculate $Cov\left(\int_{0}^{s}W_u\,du\,\,\,,\,\int_{0}^{t}W_v\,dv\right)$

How can I calculate? \begin{align} Cov\left(\int_{0}^{s}W_u\,du\,\,\,,\,\int_{0}^{t}W_v\,dv\right) \end{align} Thank you for your attention.
user avatar
2 votes
1 answer
186 views

What are the units of the variables appearing in a standard stochastic differential equation for a Wiener process?

The Black Scholes model assumes the following form for the Wiener process describing the evolution of the stock price S: $dS=\mu S dt + \sigma S dX$ Clearly $S$ ...
  • 165
3 votes
1 answer
380 views

Wiener process integral

Suppose that $W_{t}$ is a Wiener process. Assume $W_{0}=0.$ Is it true that $\int_{t=0}^{T}dW_{t}=W_{T}$? If so, why? Is one preferred to the other?
  • 770
5 votes
1 answer
183 views

Stochastic Differential

Let $W_t$ be a Wiener process. It is clear to me that $dW_t$ is of size $\sqrt{dt}$. This can be seen because $$ \mathrm{Var}(W_{t+\Delta} - W_{t})=\Delta. $$ But am I allowed to actually write $(...
  • 770
4 votes
3 answers
519 views

Show that $E[B_t|\mathscr{F}_s] = B_s$ for $B_t = W_t^3 - 3 t W_t$

Given prob space $(\Omega, \mathscr{F}, P)$ and a Wiener process $(W_t)_{t \geq 0}$, define filtration $\mathscr{F}_t = \sigma(W_u : u \leq t)$ Let $(B_t)_{t \geq 0}$ where $B_t = W_t^3 - 3tW_t$. ...
  • 831
4 votes
3 answers
853 views

Determine $E[W_p W_q W_r]$

Given prob space $(\Omega, \mathscr{F}, P)$ and a Wiener process $(W_t)_{t \geq 0}$, define filtration $\mathscr{F}_t = \sigma(W_u : u \leq t)$ Let 0 < p < q < r. Determine $E[W_p W_q W_r]$. ...
  • 831
2 votes
2 answers
5k views

How to calculate the expected value of a function of a standard brownian motion (Wiener process)

Have a problem regarding the expected value of the Wiener process inside a function, namely: Compute $E[cos(W_t)]$. To extend my question, what is the general method of computing these E´s when it ...