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2012 ORF527 Problem Set 2 Solution

Q. 1 (Uniqueness of Brownian motion).


Q. 2 (First entrance time). We dene a distance function
d(x, B) = inf{|x z| : z B}
Since B is closed, the minimum is always attained for every x. Also
|d(x, B) d(y, B)| |x y|
so this is a continuous function in x. Note that X
t
is a continuous process, so
s d(X
s
, B)
is continuous.
We argue that
{ t} =

n0
_
sQ[0,t]
_
d(X
s
, B) <
1
n
_
(1)
On one hand, when () t, then d(X

, B) = 0. For any sequence of rational


numbers q
n
converging to (), d(X
qn
, B) converges to zero, so belongs to right
hand side of (??).
Conversely, if for any n, there exists a rational number 0 q
n
t such that d(X
qn
, B) <
1/n, then there is a subsequence {q
kn
} of {q
n
}, such that q
kn
q when n , and
0 q t. Continuity of s d(X
s
, B) gives d(X
q
, B) = 0.
Finally, the right hand side of (??) is a countable intersection and union of the sets
_
d(X
s
, B) <
1
n
_
which is in F
s
F
t
. Hence { t} F
t
, and is a stopping time.
Q. 3 (First entrance and the usual conditions).
a. We show that
{ t} =

n=1
_
qQ[0,t+
1
n
)
{X
q
B}
On one hand, for each , if there exists q < t + 1/n such that X
q
B, then
t + 1/n. If this is true for every n then t.
In the other direction, if t, then for any n, there exists a time t
n
< t + 1/n
such that X
tn
B, since B is open, there exists a rational number q
n
< t + 1/n
1
sufciently close to t
n
such that X
qn
B. This shows would belong to the right
hand side.
Notice that the set
A
n
=
_
qQ[0,t+
1
n
)
{X
q
B} F
t+
1
n
is decreasing in n. So

n=1
A
n
=

n=m
A
n
F
t+
1
m
This indicates { t} F
t+1/m
for any m. Therefore
{ t}

m=1
F
t+
1
m
= F
t+
= F
t
by the right continuity of the ltration. So is a stopping time.
b. Kudos to Kevin Webster for giving this counterexample.
Let = {
1
,
2
}. G = 2

. Probability measure P on (, G) is given by


P({
1
}) = P({
2
}) =
1
2
Let T be the random variable that T(
1
) = 1, T(
2
) = 2. Dene a stochastic
process
X
t
= (t T)1(t T)
Its easy to verify this is indeed a continuous process. Now let B = (0, ), dene
= inf{t 0 : X
t
> 0} = T
We show T is not a stopping time of the natural ltration F
o
t
= {X
s
: s t}.
This can be seen from the fact that since T 1, X
t
= 0 for all t 1. So
F
o
1
= {X
s
: s 1} = {, }
On the other hand {T 1} = {
1
} / F
o
1
. So T is not a stopping time with respect
to the natural ltration.
Q. 4.
Exercise 4.4
(a) Note that is considered to be xed here. We will prove that (X
t
)
t
is a martin-
gale with respect to the ltration
F

t
= (Y
u
: u t)
2
Since X
t
= Y
t
Y

, a difference of two Gaussian variables, it is in L


1
and
adapted.
For any t
1
< t
2
, , < t
n
,
(Y
t1
, , Y
tn
) = (t
1
B
1/t1
, , t
n
B
1/tn
)
is a Gaussian vector, so (Y
t
)
t
is a Gaussian process. The mean and covariance
structure is
EY
t
= tEB
1/t
= 0
Cov(Y
t
, Y
s
) = Cov(tB
1/t
, sB
1/s
) = ts min(1/t, 1/s) = min(t, s)
So similar to the Brownian motion, we can conclude that if t
1
< t
2
, , <
t
n
s < t, then Y
t
Y
s
is independent of (Y
t1
, , Y
tn
). By a -algebra
extension argument, it is then independent of all events in F

s
. Therefore
E[X
t
|F

s
] = E[Y
t
Y

|F

s
]
= E[Y
t
Y
s
|F

s
] + (Y
s
Y

)
= E[Y
t
Y
s
] +Y
s
Y

= X
s
So (X
t
)
t
is a martingale.
(b) This basically comes from the fact that
Cov(Y
t
, Y
s
) = min(t, s)
(c) Similar to the proof of (a), we can see that (Y
t
)
t
is also a martingale, adapted
to (F

t
)
t
:
E[Y
t
|F

s
] = E[Y
t
Y
s
|F

s
] +Y
s
= Y
s
So Y
2
t
is a submartingale. From Doobs maximal inequality,
P
_
sup
st
|Y
t
|
2
>
_

E[Y
2
t
]

=
t

Note the set


_
sup
st
|Y
t
|
2
>
_
is larger when we decrease . So if we let = 1/n and take n , then
P
_
sup
0<st
|Y
t
|
2
>
_

So

n=1
P
_
sup
0<s1/n
3
|Y
t
|
2
>
1
n
_

n=1
1
n
2
<
By Borel-Cantelli lemma, this suggests |Y
t
|
2
0 as t 0, a.s. Hence
P
_
lim
t0
Y
t
= 0
_
= 1
3
Exercise 4.6 FromQ.3 we know is a stopping time. So the stopped process (X
t
)
t0
is also a martingale. B
t
is bounded above by A, so
X
t
= exp(B
t

2
t/2) exp(A)
which is a constant. Using dominated convergence theorem we conclude
EX

= lim
t
EX
t
= X
0
= 1
Or
1 = Eexp(B


2
/2)
= E[A
2
/2|B

= A]P(B

= A)
+E[A
2
/2|B

= A]P(B

= A)
Now notice that B
t
and B
t
are both Brownian motions, so the symmetry of the
boundaries indicate that the distribution of conditioned on B

= A is the same as
conditioned on B

= A, or B

= A. So the following three have the same


distributions
(|B

= A) (|B

= A)
Also by symmetry P(B

= A) = P(B

= A) = 1/2. So
1 =
1
2
_
e
A
Eexp(
2
/2) +e
A
Eexp(
2
/2)
_
So for any 0, let =
2
/2.
E[exp()] =
2
exp(

2A) + exp(

2A)
From Theorem 4.5 in the book, we know has nite moments of all orders. So from
dominated convergence,
E[
2
] = lim
0
E[
2
exp()]
= lim
0
E
_
d
2
d
2
exp()
_
= lim
0
d
2
d
2
E[exp()]
The exchange of derivative and expectation here is valid, due to a proof already shown
in class.
In the end one can get the result by directly taking the derivative. I choose to present a
method with Taylor expansion here. Expand the Laplace transform at = 0, we have
exp(

2A) + exp(

2A) =

k=0
_
(2)
k/2
A
k
k!
+ (1)
k
(2)
k/2
A
k
k!
_
= 2

k=0
(2A
2
)
k
(2k)!

k
= 2
_
1 +A
2
+
A
4
6

2
+
_
4
So
2
exp(

2A) + exp(

2A)
=
1
1 +A
2
+
A
4
6

2
+
= 1A
2
+
5A
4
6

2
+
and
lim
0
d
2
d
2
E[exp()] =
5
3
A
4
Validity of such this approach can be seen from the fact that E[exp()] equals the
hyperbolic secant of

2A, and equals


sec i(

2A)
which is complex-analytic on the positive real line (0, ).
The symmetry is crucial here: without it we wont be able to obtain the closed form
formula of E[exp()].
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