Tag Archives: JCM_math545_HW3_S23

Practice with Ito Formula

Let \(B_t\)  be a standard Brownian motion. For each of the following definitions of  \(Y_t\), find adapted stochastic process \(\mu_t\) and \(\sigma_t\) so that \(dY_t =\mu_t dt + \sigma_t dB_t\)

  1. \( Y_t =\sin(B_t) \)
  2. \( Y_t= (B_t)^p \) for \(p>0\)
  3. \( Y_t=\exp( B_t – t^2)\)
  4. \(Y_t=\log(B_t) \)
  5. \(Y_t= t^2 B_t \)

Practice with Ito and Integration by parts


\[ X_t =X_0 + \int_0^t B_s dB_s\]

where \(B_t\) is a standard Brownian Motion. Show that \(X_t\) can also be written

\[ X_t=X_0 + \frac12 (B^2_t -t)\]


Covariance of Ito Integrals

Let \(f_t\) and \(f_t\) be two stochastic processes adapted to a filtration \(\mathcal F_t\) such that

\[\int_0^\infty \mathbf E (f_t^2) dt < \infty \qquad \text{and} \qquad \int_0^\infty \mathbf E (g_t^2) dt < \infty\]

Let \(W_t\) be a standard brownian motion  also adapted to the filtration \(\mathcal F_t\) and define the stochastic processes

\[ X_t =\int_0^t f_s dW_s \qquad \text{and} \qquad Y_t=\int_0^t g_s dW_s\]

Calculate the following:

  1. \( \mathbf E (X_t  X_s ) \)
  2. \( \mathbf E (X_t  Y_t ) \)
    Hint: You know how to compute \( \mathbf E (X_t^2 ) \) and \( \mathbf E (Y_t^2 ) \). Use the fact that \((a+b)^2 = a^2 +2ab + b^2\) to answer the question. Simplify the result to get a compact expression for the answer.
  3. Show that if \(f_t=\sin(2\pi t)\) and \(g_t=\cos(2\pi t)\) then \(X_1\) and \(Y_1\) are independent random variables.(Hint: use the result here  to deduce that \(X_1\) and \(Y_1\) are mean zero gaussian random variables. Now use the above results to show that the covariance of \(X_1\) and \(Y_1\) is zero. Combining these two facts implies that the random variables are independent.)

Solving a class of SDEs

Let us try a systematic procedure for solving SDEs which works for a class of SDEs. Let
X(t)=a(t)\left[ x_0 + \int_0^t b(s) dB(s) \right] +c(t) \ .
Assuming \(a\), \(b\), and \(c\) are differentiable, use Ito’s formula to find the equation for \(dX(t)\) of the form
dX(t)=[ F(t) X(t) + H(t)] dt + G(t)dB(t)
were \(F(t)\), \(G(t)\), and \(H(t)\) are some functions of time depending on \(a,b\) and maybe their derivatives. Solve the following equations by matching the coefficients. Let \(\alpha\), \(\gamma\) and \(\beta\) be fixed numbers.

Notice that
X(t)=a(t)\left[ x_0 + \int_0^t b(s) dB(s) \right] +c(t)=F(t,Y(t)) \ .
where \(dY(t)=b(t) dB(t)\). Then you can apply Ito’s formula to this definition to find \(dX(t)\).

  1. First consider
    \[dX_t = (-\alpha X_t + \gamma) dt + \beta dB_t\]
    with \(X_0 =x_0\)
    . Solve this for \( t \geq 0\)
  2. Now consider
    \[dY(t)=\frac{\beta-Y(t)}{1-t} dt + dB(t) ~,~~ 0\leq t < 1 ~,~~Y(0)=\alpha.\]
    Solve this for \( t\in[0,1] \).
  3. \begin{align*}
    dX_t = -2 \frac{X_t}{1-t} dt + \sqrt{2 t(1-t)} dB_t ~,~~X(0)=\alpha
    Solve this for \( t\in[0,1] \).


Around the Circle

Consider the equation
dX_t &= -Y_t dB_t – \frac12 X_t dt\\
dY_t &= X_t dB_t – \frac12 Y_t dt
Let \((X_0,Y_0)=(x,y)\) with \(x^2+y^2=1\). Show that \(X_t^2 + Y_t^2 =1\) for all \(t\) and hence the SDE lives on the unit circle. Does this make intuitive sense ?