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Z t
e(ts) dWs
E[Xt |X0 = x0 ] = E + (x0 )et +
0
t
= + (x0 )e
= (Xt )dt + dWt
dXt
Z t
e(ts) dWs )2
= E (
Var[Xt |X0 = x0 ]
Solution:
Xt
= + (x0 )et +
e(ts) dWs
Var[Xt |X0 = x0 ]
Z
2(ts)
= E
2
1 e2t
2
1 e2t ).
ds =
0
2
Asymptotically Xt N (, 2
) (or always if X0 N (, 2
)).
2
1
20
40
60
80
100
= aNt dt + Nt dWt
The It
o solution:
2
0
20
time
40
60
80
100
time
= 0.01, = 1
dNt
X(t)
2
1
2
X(t)
2
1
0
1
2
X(t)
20
40
60
80
100
time
= 0.1, = 1
= 0.01, = 0.5
Nt
1
= N0 exp (a 2 )t + Wt
2
Nt
= N0 exp {at + Wt }
= N0 exp {at + Wt }
Note though:
If Wt is independent of Nt we would expect that
Thus
= E[N0 ]eat
E[Nt ]
E[Yt ]
1
= E[Y0 ] + 2
| {z } 2
=1
Let
E[eWs ] ds + E
| {z }
|
=E[Ys ]
d
1
E[Yt ] = 2 E[Yt ]
dt
2
1 2 Wt
e
dt + eWt dWt
2
Yt
1
= Y0 + 2
2
eWs ds +
eWs dWs
E[Y0 ] = 1
so that
E[Yt ] = E[eWt ]
i.e.
Z
Z
= eWt
Yt
= e
t/2
eWs dWs
{z
}
=0
Finally
1
E[Nt ] = E N0 exp (a 2 )t + Wt
2
1
= E[N0 ] exp (a 2 )t E [exp {Wt }]
2
1
1 2
= E[N0 ] exp (a 2 )t exp
t
2
2
= E[N0 ]eat
KN (x y)
(
a+ 2 /2)t
= E[N0 ]e
where a
is seen to be a different parameter from a.
10
x0 = 1
does not satisfy the linear growth condition. It has the unique
solution
xt =
1
1t
0t<1
The equation
dxt
2/3
= 3xt
, x0 = 0
dt
does not satisfy the Lipschitz condition at x = 0. It has more than
one solution:
0
for t a
xt =
(t a)3 for t > a
for any a > 0.
11
(1)
Xt
(2)
= Xt
12
If only b() and () are given, and we ask for a pair of processes
t, W
t ) then the solution is called a weak solution.
(X
Strong uniqueness means pathwise uniqueness, weak uniqueness
means that any two solutions are identical in law, i.e. have the same
finite dimensional distributions.
K(1 + |x|2 )
|bi (x)|
K(1 + |x|)
13
14
Transition densities:
dXt = b(Xt )dt + (Xt )dWt .
y 7 p(t, x, y)
There are SDEs with no strong solution, but still a unique weak
solution.
Remark: Note that the above conditions are sufficient conditions, not
necessary conditions.
n
Y
i=1
15
16
Chapman-Kolmogorov equation:
Z
p(t + s, x, y) = p(t, z, y)p(s, x, z)dz
Kolmogorovs backward equation:
Ornstein-Uhlenbeck
2p
p
p
1 2
(x) 2 + b(x)
=
2
x
x
t
with the initial condition
p(t, x, y) x
Examples:
as t 0.
p
1 2
[(y)2 p]
[b(y)p] =
2 y 2
y
t
p(t, x, y) = p
(y (x )et )2
exp
2 (1 e2t )/
2 (1 e2t )/
1
(Fokker-Planck equation)
17
18
Cox-Ingersoll-Ross
dXt = (Xt )dt +
Xt dWt
Radial Ornstein-Uhlenbeck
dXt = (Xt1 Xt )dt + dWt ,
p(t, x, y)
(y/x) 2 exp( 12 t y)
()(1 exp(t))
xy
(x + y)
exp
I
,
exp(t) 1
sinh( 12 t)
where = 2 2 and = 1.
I is a modified Bessel function with index .
> 0.
p(t, x, y) =
19
20
Taylor expansions
Review of deterministic expansions:
Consider
= af 0
Lf
d
xt
dt
= a(xt )
with initial value xt0 for t [t0 , T ], and a() is sufficiently smooth.
We can write
Z T
xt = xt0 +
a(xs )ds
t0
21
22
Z
a(xs )
La(xz )dz
= a(xt0 ) +
t0
= xt0 + a(xt0 )
s
= xt0 + a(xt0 )
La(xz )dz ds
t0
t0
23
dz ds + R2
t0
t0
ds +
t0
ds + La(xt0 )
1
= xt0 + a(xt0 )(t t0 ) + La(xt0 ) (t t0 )2 + R2
2
La(xz )dz ds
Z tZ
t0
Z tZ
t0
t0
t0
where
Z tZ
R2
=
t0
t0
t0
24
L2 a(xu )du dz ds
f (xt )
= f (xt0 ) +
r
X
(t t0 )l
l!
l=1
Ll f (xt0 ) +
t0
t0
1
= bf 0 + 2 f 00
2
= f 0
L1 f
25
26
= f (Xt0 ) +
1 0
L f (Xs )dW s
t0
t0
27
t0
t0
Z t
t0
t0
L (Xz )dz +
(Xt0 ) +
t0
1 0
L (Xz )dW z dW s
t0
= Xt0 + b(Xt0 )
L f (Xs )ds +
t0
(Xs )dW s
t0
b(Xs )ds +
= Xt0 +
sr
t0
dW s + R
ds + (Xt0 )
t0
t0
28
t0
tZ s
+
t0
t0
L1 b(Xz )dWz ds
Z tZ
t0
Note that dz ds, dWz ds and dz dWs scales like 0, whereas dWz dWs
scales like dt, comparable to the terms in the simplest expansion with
two single integrals.
t0
t0
with remainder
Z tZ
Z tZ s
0
L b(Xz )dz ds +
R =
t0
t0
tZ s
t0
Z t
t0
Z s
t0
t0
t0
L1 b(Xz )dWz ds
t0
Z tZ
t0
t0
t0
+
t0
29
30
Numeric solutions
Wj
= tj+1 tj
= Wtj+1 Wtj
Then
Wj
31
dWz dWs + R
t0
t0
t0
t0
t0
N (0, j )
32
dXt
Let us consider the expectation of the absolute error at the final time
instant T :
There exist constants K > 0 and 0 > 0 such that
E(|XT YtN |) K 0.5
where Wj =
33
34
35
We approximate Xt by
Ytj+1
36
Multi-dimensional diffusions:
Euler scheme: Similar.
Milstein scheme: Involves multiple Wiener integrals.
E(|XT YtN |) K
We could regard the Milstein scheme as the proper generalization of
the deterministic Euler-scheme.
37
(n+1)
dWu(1) dWs(2)
38