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2014 Sheet 7

This document provides exercises related to stochastic analysis and Itô calculus from a course at TU München during the winter term of 2014/2015. It includes 7 exercises to be completed for an upcoming lecture or tutorial. The exercises involve applying Itô's formula to derive stochastic differential equations and martingales for various stochastic processes involving Brownian motion, as well as solving SDEs and proving properties of their solutions. Students are instructed to submit solutions to exercises 7.1 through 7.4 at the next lecture. Exercises 7.5 through 7.7 will be discussed in upcoming tutorials.

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56 views2 pages

2014 Sheet 7

This document provides exercises related to stochastic analysis and Itô calculus from a course at TU München during the winter term of 2014/2015. It includes 7 exercises to be completed for an upcoming lecture or tutorial. The exercises involve applying Itô's formula to derive stochastic differential equations and martingales for various stochastic processes involving Brownian motion, as well as solving SDEs and proving properties of their solutions. Students are instructed to submit solutions to exercises 7.1 through 7.4 at the next lecture. Exercises 7.5 through 7.7 will be discussed in upcoming tutorials.

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aqszaqsz
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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TU München Stochastic Analysis

Zentrum Mathematik Winter Term 2014/15


Lehrstuhl für Wahrscheinlichkeitstheorie Berger/Salvi

Exercise sheet 7
Itô formula and Girsanov.

Homework:
Please hand in the solutions of Exercises from 7.1 to 7.4 in the lecture on January 22nd.

Exercise 7.1 (8 Points)

Let (Bt )t≥0 be standard Brownian motion.

(i) For a continuous and differentiable function f : R → R show that


Z t
Mt := f (t)Bt − f 0 (s)Bs ds
0

is a martingale.

(ii) Compute expectation, variance and covariance function of (Mt )t≥0 .

(iii) Consider the random variable T = inf{t ≥ 0 : Bt ∈ {a, b}} for a < 0 < b. Show
that Z T 
E[BT sin(T )] = E cos(s)Bs ds .
0

Exercise 7.2 (7 Points)

Let (Bt )t≥0 be standard Brownian motion and define for α, β > 0 and for all t ≥ 0

α2
   
Mt = exp αBt + β − t .
2

(i) RFind a stochasticRdifferential equation (i.e., an expression of the form Mt − M0 =


t t
0
a(Ms , s)dBs + 0 b(Ms , s)ds, for some functions a and b), which is solved by Mt .

(ii) Find some value of β such that Mt is a martingale.

(iii) Calculate E[hM it ] for t ≥ 0 and β such that Mt is a martingale.

Exercise 7.3 (5 Points) Rt


Let (Bt )t≥0 be standard Brownian motion and define Mt := 0 exp{Bs } dBs .

(i) Compute E[M1 M2 ].

Please turn the page!


(ii) Prove or disprove that
P(Mt > 0) > 0 and/or P(Mt < 0) > 0.

Exercises for the tutorial:


Exercises 7.5 - 7.7 will be discussed in the tutorials on January the 22nd (Group 1) and
January the 29th (Groups 2 and 3).

Exercise 7.4

Let (Bt )t≥0 be a Brownian Motion. Solve the Stochastic Differential Equation (SDE)
dXt = σXt dBt + µXt dt.

Exercise 7.5

Let (Bt )t≥0 be a Brownian Motion. Solve the SDE


dXt = θ(µ − Xt ) dt + σ dBt .

Exercise 7.6

Let (Bt )t≥0 be a Brownian Motion. Prove that the following SDE has a unique (strong)
solution: p Xt  p
dXt = 1 + Xt2 + dt + 1 + Xt2 dBt .
2

Exercise 7.7
Let (Bt )t≥0 be standard Brownian motion.
(i) Show that the process (Xt )t≥0 defined by
 
1
dXt = sin dt + dBt
Bt
is also Brownian motion.
(ii) Show that the stochastic differential equation
(  
dXt = sin X1t dt + dBt
X 0 = x0

has a weak solution on every interval [0, T ], T ≥ 0.

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