Scribd Logo
Upload

Welcome to Scribd!

  • 154 views

    It o Integral and It o - Doeblin Formula Stochastic Differential Equations

    Uploaded by

    Tấn Vũ Huỳnh
    This document discusses stochastic differential equations (SDEs) and provides examples of solving SDEs using various approaches: 1) It presents the Itô integral and Itô-Doeblin formula, and provides exercises calculating expectations, variances, martingales, and stochastic integrals involving Brownian motion processes. 2) Examples are given of solving SDEs using matching and Itô-Doeblin formula approaches. SDEs discussed include geometric Brownian motion, Ornstein-Uhlenbeck, Vasicek, and Cox-Ingersoll-Ross interest rate models. 3) Simulation methods are mentioned as another approach for solving SDE problems numerically.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd

    It o Integral and It o - Doeblin Formula Stochastic Differential Equations

    Uploaded by

    Tấn Vũ Huỳnh
    154 views3 pages
    This document discusses stochastic differential equations (SDEs) and provides examples of solving SDEs using various approaches: 1) It presents the Itô integral and Itô-Doeblin formula, and provides exercises calculating expectations, variances, martingales, and stochastic integrals involving Brownian motion processes. 2) Examples are given of solving SDEs using matching and Itô-Doeblin formula approaches. SDEs discussed include geometric Brownian motion, Ornstein-Uhlenbeck, Vasicek, and Cox-Ingersoll-Ross interest rate models. 3) Simulation methods are mentioned as another approach for solving SDE problems numerically.

    Original Title

    Ito-SDE(1)

    Copyright

    © © All Rights Reserved

    Available Formats

    PDF, TXT or read online from Scribd

    Did you find this document useful?

    Is this content inappropriate?

    This document discusses stochastic differential equations (SDEs) and provides examples of solving SDEs using various approaches: 1) It presents the Itô integral and Itô-Doeblin formula, and provides exercises calculating expectations, variances, martingales, and stochastic integrals involving Brownian motion processes. 2) Examples are given of solving SDEs using matching and Itô-Doeblin formula approaches. SDEs discussed include geometric Brownian motion, Ornstein-Uhlenbeck, Vasicek, and Cox-Ingersoll-Ross interest rate models. 3) Simulation methods are mentioned as another approach for solving SDE problems numerically.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    154 views3 pages

    It o Integral and It o - Doeblin Formula Stochastic Differential Equations

    Uploaded by

    Tấn Vũ Huỳnh
    This document discusses stochastic differential equations (SDEs) and provides examples of solving SDEs using various approaches: 1) It presents the Itô integral and Itô-Doeblin formula, and provides exercises calculating expectations, variances, martingales, and stochastic integrals involving Brownian motion processes. 2) Examples are given of solving SDEs using matching and Itô-Doeblin formula approaches. SDEs discussed include geometric Brownian motion, Ornstein-Uhlenbeck, Vasicek, and Cox-Ingersoll-Ross interest rate models. 3) Simulation methods are mentioned as another approach for solving SDE problems numerically.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    of 3
    At a glance
    Powered by AI
    The document discusses stochastic differential equations (SDEs), which are used to model random processes that evolve continuously over time, such as stock prices or interest rates. Various techniques are presented for solving SDEs exactly or through simulation.

    Stochastic differential equations are used to model random processes whose values evolve continuously over time based on random fluctuations, such as stock prices, interest rates, and other financial quantities.

    Stochastic differential equations can be solved exactly using techniques like applying Itô's lemma to transform the SDE into an ordinary differential equation, or through numerical simulation methods. Common exact methods presented are matching and applying Itô's formula.

    Itô integral and Itô - Doeblin formula

    Stochastic Differential Equations

    January 3, 2021

    In the following exercises {Bt }t≥0 is a standard Brownian motion process with filtration (Ft )t≥0 .

    1 Itô integral and Itô - Doeblin formula


    1. Determine the distribution of Z t
    It = sin(s)dBs .
    0

    2. The integral Z t
    It = Bs ds
    0
    is not a stochastic integral although they are random variable. For each w, the integrand is nice continuous
    functions of s and the integration ds is just traditional (Riemann) calculus integration. Find expectation
    E(It ) and variance V ar(It ).
    Hint Show that Z t Z t
    sdBs = tBt − Bs ds.
    0 0
    Rt
    and using martingale and isometry properties of Itô integral 0
    sdBs .
    3. Find dBt3 and dBt2 .
    4. Prove that

    (a) Xt = Bt3 − 3tBt


    (b) Mt = Bt2 − t
    are Ft - martingale. Deduce EBt3 and EBt2 .
    Hint: use martingale property of Itô integral and property of martingale EMt = EM0

    5. (Optional) Let
    βk (t) = E(Btk ).
    (a) Find dBtk
    (b) Prove that
    Z t
    1
    βk (t) = k(k − 1) βk−2 (s)ds
    2 0

    (c) Deduce that E(Bt4 ) = 3t2


    (d) Determine a formula for E(Bt2n ) and E(Bt2n+1 ).

    6. Let Rt
    µ(s)ds− 12 σ 2 t+σBt .
    St = S0 e 0

    Find dSt .

    1
    7. Assume that dSt = µSt dt + σSt dBt . Compute
    (a) d(2St )
    (b) d(Stn )
    Rt
    θs dBs − 21 θs2 ds
    8. (Exponential martingale) Let Zt = e 0

    (a) Prove that dZt = Zt θt dBt . Hence Zt is Ft - martingale


    (b) Find E(Zt )
    (c) Find E(St ) in Exercise 6

    2 SDEs
    1. Solve the SDE
    dXt = 5dt + 2dBt , X0 = 1
    to find the distribution of X1 .
    2. Suppose that the process (Xt )t≥0 is governed by the geometric Brownian motion:

    dXt = 3Xt dt + 2Xt dBt .

    Find the distribution of the random variable (X7 |X2 = 2) by 2 approaches


    Approach 1 Matching method
    Approach Apply Itô - Doeblin formula for Yt = ln Xt
    3. Solve the SDE 2
    dXt = tXt dt + et /2
    dBt
    Find EX1 .
    4. Solve the SDE
    dXt = (−Xt + 2)dt + dBt , X0 = 1
    and find EX1 .

    5. Suppose that the process (Xt )t≥0 is governed by the Ornstein-Uhlenbeck process:

    dXt = 7(4 − Xt )dt + 3dBt .

    Find the conditional distribution of the random variable (X7 |X3 = 4).
    Hint: consider Yt = 4 − Xt
    6. (Solving the Vasicek equation). The Vasicek interest rate is driven by the stochastic differential equation

    dRt = (α − βRt )dt + σdBt ,

    where α, β, σ are positive constant. This exercise shows how to derive this solution. Solve this SDE by 2
    approaches
    Approach 1 Matching method
    Approach 2 i. Apply Itô - Doeblin formula to compute d(eβt R(t)).
    ii. Integrate the equation you obtained in a) to solve for Rt .
    7. (Solving CIR equation) The Cox - Ingersoll - Ross interest rate is given by
    p
    dRt = (α − βRt )dt + Rt σdBt ,

    where α, β, σ are positive constant. Although there is no closed - form solution for CIR model but we can
    determine the distribution of Rt for each given positive t

    2
    (a) Apply Itô - Doeblin formula to compute d(eβt R(t)) to show that
    Z t
    α βt p
    eβt Rt = R0 + (e − 1) + σ eβu Ru dBu
    β 0

    (b) For α = 3, β = 7 and σ = 2.


    i. Find E(Rt ) and E(Xt ).
    ii. Let Xt = eβt R(t), apply Itô - Doeblin formula for f (x) = x2 to show that
    Z t Z t 3
    βu
    Xt2 = X02 + (2α + σ 2 ) eβu Xu du + 2σ e 2 Xu2 dBu .
    0 0

    iii. Take expectation both sides to derive E(Xt2 ) and then E(Rt2 ).
    iv. Compute V ar(Rt )

    8. Solve the above problems by simulation.

    You might also like