Fuzzy Differential Equations

Xiaowei Chen
Uncertainty Theory Laboratory Department of Mathematical Sciences Tsinghua University Beijing 100084, China chenxw07@mails.thu.edu.cn http://orsc.edu.cn/xwchen

August 28, 2008

Copyright c 2008 by UTLAB

Reference to this book should be made as follows: Chen X, Fuzzy Dierential Equations, http://orsc.edu.cn/process/fde.pdf

UTLAB ONLINE BOOKS

Edited by Baoding Liu Uncertainty Theory Laboratory Tsinghua University, Beijing Email: liu@tsinghua.edu.cn Vol.1: Baoding Liu, Uncertainty Theory, 3rd ed., http://orsc.edu.cn/liu/ut.pdf. Vol.2: Baoding Liu, Theory and Practice of Uncertain Programming, 2nd ed.,http://orsc.edu.cn/liu/up.pdf. Vol.3: Zhongfeng Qin and Xiang Li, Fuzzy Calculus for Finance, http://orsc.edu.cn/process/fc.pdf. Vol.4: Xiang Li, Credibilistic Logic and Uncertain Logic, http://orsc.edu.cn/xli/ulogic.pdf. Vol.5: Xiaowei Chen, Fuzzy Dierential Equations, http://orsc.edu.cn/xwchen/fde.pdf. Vol.6: Yuanguo Zhu,Fuzzy Control Theory, http://orsc.edu.cn/ygzhu/fct.pdf. For up-to-date information, please visit http://orsc.edu.cn/utlab!

Contents
Preface 1 Preliminaries 1.1 Fuzzy Variables . . . 1.2 Membership Function 1.3 Independence . . . . . 1.4 Expected Value . . . 1.5 Variance . . . . . . . 1.6 Inequalities . . . . . . 1.7 Convergence Concepts 2 Liu 2.1 2.2 2.3 2.4 vii 1 1 2 4 5 6 7 8 11 11 12 12 15 17 17 18 20 25 25 26 30 33 33 34

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Process Fuzzy Process . . . . . Fuzzy Renewal Process Liu Process . . . . . . . Geometric Liu Process .

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3 Fuzzy Calculus 3.1 Liu Integral . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2 Liu Formula . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.3 Multi-dimensional Cases . . . . . . . . . . . . . . . . . . . . 4 Fuzzy Dierential Equation 4.1 Denition and Examples . . . . . . . . . . . . . . . . . . . . 4.2 Solutions to Some Fuzzy Dierential Equations . . . . . . . . 4.3 Existence and Uniqueness Theorem . . . . . . . . . . . . . . 5 The Stability of Fuzzy Dierential Equations 5.1 Some Denitions of Stability . . . . . . . . . . . . . . . . . . 5.2 Have Some Try . . . . . . . . . . . . . . . . . . . . . . . . . .

vi 6 Fuzzy Stock Model 6.1 Why Fuzziness? . . . . . . . . 6.2 Lius Stock Model . . . . . . . 6.3 European Options . . . . . . . 6.4 American Options . . . . . . . 6.5 Asian Options . . . . . . . . . 6.6 Exotic Options . . . . . . . . . 6.7 Generalized Lius Stock Model 6.8 Multi-factor Lius Stock Model 7 Fuzzy Control System A Stochastic Calculus B Fuzzy Renewal Process Bibliography List of Frequently Used Symbols Index

Contents

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35 35 35 36 40 40 41 43 44 47 49 53 55 59 60

Preface
Stochastic dierential equation was well established as one of the most important branch of modern mathematics in probability theory and has a wide application. In order to deal with fuzzy dynamic system, we also need such a tool called fuzzy dierential equation. The object of this book is to develop the theory of systems of the theory of fuzzy dierential equation and then give applications fuzzy stock model and fuzzy control problem. Baoding Liu proposed a fuzzy process, a dierential formula and a fuzzy integral in a seminar during summer holidays of 2007. Later, the community renamed those three footstones Liu process, Liu formula and Liu integral due to their importance and usefulness. Fuzzy calculus originated with Baoding Lius pioneering paper Fuzzy Process, Hybrid Process and Uncertain Process in 2008. After that, fuzzy calculus was developed steadily. Fuzzy dierential equation is a type of dierential equations driven by Liu process. The study of fuzzy dierential equation was started by Baoding Lius pioneering paper Fuzzy Process, Hybrid Process and Uncertain Process in 2008. Numerous research results were then reported in the literature. Fuzzy dierential equations was introduced to nance by Baoding Liu when he addressed the 2007 First Intelligent Computing Conference held on Lushan Mountain and presented an audacious and surprising assumption that stock price follows geometric Liu process, thus producing a fuzzy stock model known as Lius stock model. The rst option pricing formula for this model was given by Qin and Lis paper Option Pricing Formula for Fuzzy Financial Market in 2008. Fuzzy dierential equations was introduced to fuzzy control theory by Zhus paperFuzzy Optimal Control with Application to Portfolio Selection in 2008. Xiaowei Chen Tsinghua University August 28, 2008

Chapter 1

Preliminaries
The concept of fuzzy set was initiated by Zadeh [65] via membership function in 1965. In order to dene a self-dual measure for fuzzy event, Liu and Liu [45] presented the concept of credibility measure. In addition, a sucient and necessary condition for credibility measure was given by Li and Liu [19]. Credibility theory, founded by Liu [35] in 2004 and rened by Liu [38] in 2007, is a branch of mathematics for studying the behavior of fuzzy phenomena. The interested readers may consult Lius book Uncertainty Theory at http://orsc.edu.cn/liu/ut.pdf. The emphasis in this chapter is mainly on credibility measure, credibility space, fuzzy variable, membership function, independence,expected value, variance, convergence almost surely, convergence in credibility, convergence in distribution, and fuzzy process.

1.1

Fuzzy Variables

Let be a nonempty set, and P the power set of . Each element A in P is called an event. In order to present an axiomatic denition of credibility, it is necessary to assign to each event A a number Cr{A} which indicates the credibility that A will occur. In order to ensure that the number Cr{A} has certain mathematical properties which we intuitively expect a credibility to have, we accept the following four axioms: Axiom 1. (Normality) Cr{} = 1. Axiom 2. (Monotonicity) Cr{A} Cr{B} whenever A B. Axiom 3. (Self-Duality) Cr{A} + Cr{Ac } = 1 for any event A. Axiom 4. (Maximality) Cr {i Ai } = supi Cr{Ai } for any events {Ai } with supi Cr{Ai } < 0.5. Denition 1.1 (Liu and Liu [45]) The set function Cr is called a credibility

Chapter 1 - Preliminaries

measure if it satises the normality, monotonicity, self-duality, and maximality axioms. Theorem 1.1 Let Cr be a credibility measure. Then Cr{} = 0 and 0 Cr{A} 1 for any A P. Denition 1.2 Let be a nonempty set, P the power set of , and Cr a credibility measure. Then the triplet (, P, Cr) is called a credibility space.

Denition 1.3 A fuzzy variable is dened as a (measurable) function from a credibility space (, P, Cr) to the set of real numbers. An n-dimensional fuzzy vector is dened as a function from a credibility space (, P, Cr) to the set of n-dimensional real vectors. It has been proved that (1 , 2 , , n ) is a fuzzy vector if and only if 1 , 2 , , n are fuzzy variables. Denition 1.4 Let f : n be a function, and 1 , 2 , , n fuzzy variables on the credibility space (, P, Cr). Then = f (1 , 2 , , n ) is a fuzzy variable dened as () = f (1 (), 2 (), , n ()) for any . (1.1)

1.2

Membership Function

Denition 1.5 (Liu [38]) Let be a fuzzy variable dened on the credibility space (, P, Cr). Then its membership function is derived from the credibility measure by (x) = (2Cr{ = x}) 1, x . (1.2) Example 1.1: A fuzzy variable is called equipossible f if it is fully determined by the pair (a, b) of crisp numbers with a < b and its membership function is given by 1, if a x b (x) = 0, otherwise. Example 1.2: A fuzzy variable is called a triangular fuzzy variable if it is fully determined by the triplet (a, b, c) of crisp numbers with a < b < c and its membership function is given by xa b a , if a x b xc (x) = b c , if b x c 0, otherwise.

Section 1.2 - Membership Function

(x) . ... . . .............................. ................................................ 1. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ............................................................................................... x . . . .. 0. . . a b . . Figure 1.1: Membership functions of equipossible fuzzy variable (x) . ... . . . . . . 1 ......................... . . . . . . . . .. . ...... . . . . . . . . .. . ..... . . . .... . . ... . . . . .... . . . . . . . .... . . . . . . . .. . .............................................................................................. . . . . . .... .. x . 0. . a c . b . Figure 1.2: Membership functions of triangular fuzzy variable (a, b, c)

Example 1.3: A fuzzy variable is called a trapezoidal fuzzy variable if it is fully determined by the quadruplet (a, b, c, d) of crisp numbers with a < b < c < d and its membership function is given by x a , if a x b ba 1, if b x c (x) = xd c d , if c x d 0, otherwise.

(x) . . ... . . ............................................ . . 1. . ... . . .... . . .. . ... . . . . . . ... . ... . . . . . .. . . .. . . . . . ... . . .. . . . . .. ... . . . . . . . .. . . . . . ... . .. . . . . .. . . . . . .. . . . . . . ............................................................................................... x . . .. 0. . a c . b d . Figure 1.3: Membership functions of trapezoidal fuzzy variable (a, b, c, d)

Chapter 1 - Preliminaries

Example 1.4: A fuzzy variable is called normally distributed if it has a normal membership function (x) = 2 1 + exp |x e| 6
1

x , > 0.

(1.3)

Example 1.5: A fuzzy variable is called exponentially distributed if it has a exponential membership function x (x) = 2 1 + 6m
1

x 0, m > 0.

(1.4)

Theorem 1.2 (Liu [38]) (Credibility Inversion Theorem) Let be a fuzzy variable with membership function . Then for any set B of real numbers, we have 1 sup (x) + 1 sup (x) . (1.5) Cr{ B} = 2 xB xB c Theorem 1.3 (Liu [38])(Sucient and Necessary Condition for Membership Function) A function : R [0, 1] is a membership function if and only if sup (x) = 1

1.3

Independence

The independence of fuzzy variables has been discussed by many authors. Here we use the denition given by Liu and Gao [46]. Denition 1.6 (Liu and Gao [46]) The fuzzy variables 1 , 2 , , m are said to be independent if
m

Cr
i=1

{i Bi }

= min Cr {i Bi }
1im

(1.6)

for any sets B1 , B2 , , Bm of real numbers. Theorem 1.4 The fuzzy variables 1 , 2 , ..., m are independent if and only if
m

Cr
i=1

{i B}

= max Cr{i B}
1im

for any sets B1 , B2 , ..., Bm of R Theorem 1.5 (Extension Principle of Zadeh) Let 1 , 2 , , n be independent fuzzy variables with membership functions 1 , 2 , , n , respectively,

Section 1.4 - Expected Value

and f : n a function. Then the membership function of = f (1 , 2 , , n ) is derived from the membership functions 1 , 2 , , n by (x) =
x=f (x1 ,x2 , ,xn ) 1in

sup

min i (xi )

(1.7)

for any x . Here we set (x) = 0 if there are not real numbers x1 , x2 , , xn such that x = f (x1 , x2 , , xn ).

1.4

Expected Value

Liu and Liu [45] gave a denition of expected value operator of fuzzy variable which is not only applicable to continuous fuzzy variables but also discrete ones. Denition 1.7 (Liu and Liu [45]) Let be a fuzzy variable. Then the expected value of is dened by
+ 0

E[] =
0

Cr{ r}dr

Cr{ r}dr

(1.8)

provided that at least one of the two integrals is nite. Example 1.6: Suppose that is a fuzzy variable with a normal membership function (x) = 2 1 + exp |x e| 6
1

x , > 0.

(1.9)

It follows from credibility inversion theorem that Cr{ r} = and Cr{ r} = If e > 0, then we have
+ 0

1 + exp

(e r) 6 (r e) 6

1 + exp

E[] =
0 e

Cr{ r}dr
+

Cr{ r}dr
0

=
0

Cr{ r}dr +
e
e 6

Cr{ r}dr

e 6

Cr{ r}dr

6 6 = = e. =

0
e 6

1 dr + 1 + exp(r)

exp(r) dr 1 + exp(r)

1dr

Chapter 1 - Preliminaries

Similarly, for e 0, we also have E[] = e. Thus we always have the expected value e. Example 1.7: Suppose that is a fuzzy variable with a exponential membership function (x) = 2 1 + exp x 6m
1

x 0, m > 0.

(1.10)

It follows from credibility inversion theorem that r 1 1 + exp Cr{ r} = 6m 0, and Cr{ r} = It follows from Denition 1.7 that
+

, if r 0 if r > 0,

1 + exp

r 6m 0,

, if r 0 if r > 0.

E[] =
0 +

Cr{ r}dr 1 + exp

0

= =

r 6m

dr

6m + 1 du 1 + exp(u) 0 6m ln 2 = .

Theorem 1.6 (Liu and Liu [45]) Let and be independent fuzzy variables with nite expected values. Then for any numbers a and b, we have E[a + b] = aE[] + bE[].

1.5

Variance

Denition 1.8 (Liu and Liu [45]) Let be a fuzzy variable with nite expected value e. Then the variance of is dened by V [] = E[( e)2 ]. Theorem 1.7 If is an independent fuzzy variable whose variance exists, a and b are two real numbers, then V [a + b] = a2 V [].

Section 1.6 - Inequalities

Example 1.8: Suppose that is a fuzzy variable with a normal membership function (x) = 2 1 + exp |x e| 6
1

x , > 0.

(1.11)

It follows from Denition 1.8 that V [] = E[( e)2 ]

+

=
0 +

Cr ( e)2 r dr Cr
0 +

= =
0 +

e+

r e

dr

Cr e + 1 + exp
0

r dr
1

= =

12 2 + 2 0 12 2 2 = 2 . = 2 12

r 6 r dr 1 + exp(r)

dr

1.6

Inequalities

There are several useful inequalities for random variables,such as Markov inequality, Chebyshev inequality, Hld s inequality, Minkowski inequality, and o Jensens inequality. This section we will introduce the analogous inequalities for fuzzy variables. Theorem 1.8 Let be a fuzzy variable, and f a nonnegative function. If f is even and increasing on [0, +], then for any given number t > 0, we have Cr{|| t} E[f ()] . f (t)

Theorem 1.9 (Morkov Inequality) Let be a fuzzy variable. For any given number t > 0 and p numbers t > 0 and p > 0, we have Cr|| t E[()p ] . tp

Theorem 1.10 (Hlds Inequality) Let p and q be two positive real numbers o 1 with p + 1 = 1, and and be independent fuzzy variables with E[||p ] < + q and E[||q ] < +. We have E[||]
p

E[||p ] q E[||q ]

Chapter 1 - Preliminaries

Theorem 1.11 (Minkowski Inequality) Let p be a real number with p 1, and let and be independent fuzzy variables with E[||p ] < + and E[||q ] < +. Then we have
p

E[| + |p ]

E[||p ] +

E[||p ].

Theorem 1.12 (Jensens Inequality) Let be a fuzzy variable, and f : R R a convex function. If E[||] and E[f ()] are nite, then f (E[]) E[f ()].

1.7

Convergence Concepts

The most useful convergence concepts of fuzzy sequence consisting of convergence almost surely,convergence in credibility, convergence in mean, and convergence in distribution are discussed in this section. Dention 1.9 Suppose that 1 , 2 , ... are fuzzy variables dened on the credibility space (, P, Cr). The sequence {i } is said to be convergent a.s. to if and only if there exists an event A with CrA such that
i+

lim |i () ()| = 0

for every A. In that case we write i ,a.s. Denition 1.10 Suppose that 1 , 2 , ... are fuzzy variables dened on the credibility space (, P, Cr). We say that the sequence {i } converges in credibility to if lim Cr{|i | } = 0
i+

for every 0. Denition 1.11 Suppose that 1 , 2 , ... are fuzzy variables with expected values dened on the credibility space (, P, Cr). We say that the sequence {i } converges in mean to if
i+

lim E[|i |] = 0.

In addition, the sequence {i } is said to converge in mean square to xi if

i+

lim E[|i |2 ] = 0.

Theorem 1.13 Suppose that 1 , 2 , ... are fuzzy variables dened on the credibility space (, P, Cr). If the sequence {i } converges in mean to i converges in credibility to .

Section 1.7 - Convergence Concepts

Theorem 1.14 Suppose that 1 , 2 , ... are fuzzy variables dened on the credibility space (, P, Cr). If the sequence {i } converges in credibility to i converges a.s. to . Theorem 1.15 Suppose that 1 , 2 , ... are fuzzy variables dened on the credibility space (, P, Cr). If the sequence {i } converges in credibility to i converges in distribution to .

Chapter 2

Liu Process
2.1 Fuzzy Process
Denition 2.1 (Liu [39]) Let T be an index set and let (, P, Cr) be a credibility space. A fuzzy process is a function from T (, P, Cr) to the set of real numbers. That is, a fuzzy process Xt () is a function of two variables such that the function Xt () is a fuzzy variable for each t . For each xed , the function Xt ( ) is called a sample path of the fuzzy process. A fuzzy process Xt () is said to be sample-continuous if the sample path is continuous for almost all . The index t T is often interpreted as time, as a result, Xt is regarded as the state of the process at time t. When T is a countable set the fuzzy process is said to be a discrete-time process. If T is an interval of the real line, the fuzzy process is said to be a continuous-time process. For instance, {Xn , n = 0, 1, } is a discrete-time fuzzy process indexed by the nonnegative integers; while {Xt , t 0} is a continuous-time fuzzy process indexed by the nonnegative real numbers. Thus, a fuzzy process is a family of fuzzy variables that describes the evolution through time of some process. Denition 2.2 (Liu [39]) A fuzzy process Xt is said to have independent increments if Xt1 Xt0 , Xt2 Xt1 , , Xtk Xtk1 (2.1)

are independent fuzzy variables for any times t0 < t1 < < tk . A fuzzy process Xt is said to have stationary increments if, for any given t > 0, the Xs+t Xs are identically distributed fuzzy variables for all s > 0.

12

Chapter 2 - Liu Process

2.2

Fuzzy Renewal Process

Denition 2.3 (Zhao and Liu) Let 1 , 2 , ... be iid positive fuzzy variables. Dene S0 = 0 and Sn = 1 + 2 + ... + n for n 0. Then the fuzzy process Nt = max{n|Sn t}
n0

is called fuzzy renewal process. If , 2 , ... denote the interarrival timea of successive events. Then Sn can be regarded as the waiting time until the occurrence of the nth event, and Nt is the number of renewals in (, t]. Each sample path of Nt is a right-continuous and increasing step function taking only nonnegative integer values. Furthermore, the size of each jump of Nt is always 1. In other words, Nt has at most one renewal at each time. In particular, Nt does not jump at time 0. Since Nt n if and only if Sn t, we have Cr{Nt n} = Cr{Sn t} = Cr{1 t }. n

Theorem 2.1 Let Nt be a fuzzy renewal process with interarrival times 1 , 2 , .... Then we have

E[Nt ] =
n=1

Cr{Sn t} =
n=1

Cr{1

t }. n

Theorem 2.2 (Renewal Theorem) Let Nt be a fuzzy renewal process with interarrival times 1 , 2 , .... Then E[Nt ] 1 = E[ ]. t t 1 lim

2.3

Liu Process

This subsection introduces a fuzzy counterpart of Brownian motion, and provides some basic mathematical properties. Denition 2.1 (Liu [39]) A fuzzy process Ct is said to be a Liu process if (i) C0 = 0, (ii) Ct has stationary and independent increments, (iii) every increment Cs+t Cs is a normally distributed fuzzy variable with expected value et and variance 2 t2 whose membership function is (x) = 2 1 + exp |x et| 6t
1

, < x < +.

Section 2.3 - Liu Process

13

The parameters e and are called the drift and diusion coecients, respectively. Liu process is said to be standard if e = 0 and = 1. Any Liu process may be represented by et + Ct where Ct is a standard Liu process. Perhaps the readers would like to know why the increment is a normally distributed fuzzy variable. The reason is that a normally distributed fuzzy variable has maximum entropy when its expected value and variance are given, just like a normally distributed random variable. Theorem 2.1 (Liu [39], Existence Theorem) There is a Liu process. Furthermore, each version of Liu process is sample-continuous. Proof: Without loss of generality, we only prove that there is a standard Liu process on the range of t [0, 1]. Let (r) r represents rational numbers in [0, 1] be a countable sequence of independently and normally distributed fuzzy variables with expected value zero and variance one. For each integer n, we dene a fuzzy process 1 k i k , if t = (k = 0, 1, , n) n i=1 n n Xn (t) = linear, otherwise. Since the limit
n

lim Xn (t)

exists almost surely, we may verify that the limit meets the conditions of Liu process. Hence there is a standard Liu process. Remark 2.1: Suppose that Ct is a standard Liu process. It is easy to prove that X1 (t) = Ct , (2.2) X2 (t) = aCt/a , X3 (t) = Ct+s Cs are each a version of standard Liu process. Theorem 2.2 (Dai [6]) Suppose that Ct is a Liu process. Then we have Cr lim Ct = Cs = 1
ts

(2.3) (2.4)

Proof: Since Ct is a Liu process with expected value et and variance 2 t2 , it 0 is obvious that (Ct et)/ is a standard Liu process. Write Ct = (Ct et)/. Let {tn } be a sequence such that tn s. Then, we only have to prove that Cr
n 0 0 lim (Ctn Cs ) = 0 = 1.

14 For any given integer j > 0, we have

0 0 Ctn Cs l=1 n=l

Chapter 2 - Liu Process

Cr

1 m

Cr

0 0 Ctn Cs

n=j

1 . m

It is obvious that Cr
0 0 Ctj Cs

1 m

1 + exp

6m(tj s)

< 0.5.

Therefore, we have 1 0 0 Cr Ctn Cs = m n=j Since j is arbitrary, we obtain

1 + exp

6m supnj (tn s)

Cr
l=1 n=l

0 0 Ctn Cs

1 m
1

lim At last, we have Cr

1 + exp

6m supnj (tn s)

= 0.

0 0 lim (Ctn Cs ) = 0 0 0 Ctn Cs m=1 l=1 n=l

= 1 Cr

1 m

= 1.

Consequently, Cr lim Ct = Cs = 1 holds. The proof is complete.

ts

Theorem 2.3 (Dai [6]) Let Ct be a standard Liu process. For any with Cr{} > 0, we have |Ct () Cs ()| < . |t s| 0<s<t sup (2.5)

Proof: If Equation (2.5) does not hold, then, for any given k > 0, there exist two real numbers t and s such that |Ct () Cs ()| > k. |t s|

Section 2.4 - Geometric Liu Process

15

It is obvious that {|Ct () Cs ()| > k|t s|}. We have Cr{} Cr{|Ct () Cs ()| > k|t s|} = 1 + exp k 6
1

Let k increasingly turn to innity, we have Cr{} = 0. This is in contradiction with Cr{} > 0. Therefore, the assumption is not true. The proof is complete. Theorem 2.4 (Dai [6]) Liu process is Lipschitz-continuous. Proof: For any given such that Cr{} > 0, let K() = sup |Ct () Cs ()| . |t s| 0<s<t

For any given , Ct () is a function respect to t and satises Lipschitzcondition with K(), as follows, |Ct () Cs ()| < K()|t s|. Thus Ct is Lipschitz-continuous. The proof is complete. This theorem means that almost all Liu paths are Lipschitz continuous and have a nite variation. Thus almost all Liu paths are dierentiable almost everywhere and have zero squared variation. Theorem 2.5 For any number l (0, 0.5), there is a sample with Cr{} = l such that Ct () is not dierentiable in a dense set of t. As a byproduct, Liu path is an example of Lipschitz continuous function whose nondierentiable points are dense, while Brownian path is an example of continuous function that is nowhere dierentiable. In other words, Liu path is a Lipschitz continuous function and Brownian path is a continuous function but non-Lipschitz.

2.4

Geometric Liu Process

Denition 2.2 (Liu [39]) Let Ct be a standard Liu process. Then et + Ct is a Liu process, and the fuzzy process Gt = exp(et + Ct ) is called a geometric Liu process. Geometric Liu process Gt may be employed to model stock prices. It not only inherits from the very irregular paths of Liu process but also avoids the possibility that stock price is negative. (2.6)

16

Chapter 2 - Liu Process

Theorem 2.6 (Li and Qin [21]) For each t > 0, Gt has a lognormal membership function (z) = 2 1 + exp and expected value E[Gt ] = exp(et) csc( 6t) 6t, t < /( 6). Proof: If t < /( 6), it is easy to prove that the expected value is
+

| ln z et| 6t

z0

(2.7)

(2.8)

E[Gt ] =
0

Cr{Gt r}dr
exp(et)

=
0

1 1 + exp + 1 + exp

(et ln x) 6t

dx
1

(ln x et) dx 6t exp(et) exp(et) exp e/ 6t = dx exp e/ 6t + x/ 6t 0 exp e/ 6t + dx / 6t exp(et) exp e/ 6t + x exp e/ 6t = dx exp e/ 6t + x/ 6t 0

= exp(et) 1 + x/ 6t 0 = exp(et) 6t csc( 6t). Otherwise, we have E[Gt ] = .

dx

Chapter 3

Fuzzy Calculus
Let Ct be a standard Liu process, and dt an innitesimal time interval. Then dCt = Ct+dt Ct is a fuzzy process such that, for each t, the dCt is a normally distributed fuzzy variable with E[dCt ] = 0, V [dCt ] = dt2 ,
2 E[dCt ] = dt2 , 2 V [dCt ] 7dt4 .

3.1

Liu Integral

Denition 3.1 (Liu [39]) Let Xt be a fuzzy process and let Ct be a standard Liu process. For any partition of closed interval [a, b] with a = t1 < t2 < < tk+1 = b, the mesh is written as = max |ti+1 ti |.
1ik

Then the Liu integral of Xt with respect to Ct is

b k

Xt dCt = lim
a

Xti (Cti+1 Cti )

i=1

(3.1)

provided that the limit exists almost surely and is a fuzzy variable. Using the denition of Liu integral, we may calculate some simple examples. Example 3.1: Let Ct be a standard Liu process. Then for any partition 0 = t1 < t2 < < tk+1 = s, we have
s k

dCt = lim
0

(Cti+1 Cti ) Cs C0 = Cs .
i=1

18

Chapter 3 - Fuzzy Calculus

Example 3.2: Let Ct be a standard Liu process. Then for any partition 0 = t1 < t2 < < tk+1 = s, we have
k

sCs =
i=1 k

ti+1 Cti+1 ti Cti

k

=
i=1 s

ti (Cti+1 Cti ) +
i=1 s

Cti+1 (ti+1 ti )

tdCt +
0

Ct dt

as 0. It follows that
s s

tdCt = sCs
0 0

Ct dt.

Denition 3.2 Let Xt be a fuzzy process and let Ct be a standard Liu prob cess. If Liu integral a Xt dCt exists and is a fuzzy variable, then Xt is called Liu integrable. Theorem 3.1 (You [62]) Any continuous fuzzy process is Liu integrable.

3.2

Liu Formula

Theorem 3.2 (Liu [39]) Let Ct be a standard Liu process, and let h(t, c) be a continuously dierentiable function. Suppose that fuzzy process Xt is derived by dXt = ut dt + vt dCt where ut and vt are absolutely integrable fuzzy processes. Dene Yt = h(t, Xt ). Then we have the following chain rule dYt = h h (t, Xt )dt + (t, Xt )dXt t x (3.2)

which is called Liu formula. Proof: Since the function h is continuously dierentiable, by using Taylor series expansion, the innitesimal increment of Yt has a rst-order approximation h h Yt = (t, Xt )t + (t, Xt )Xt . t x Hence we obtain the chain rule because it makes
s s 0

Ys = Y0 +
0

h (t, Xt )dt + t

h (t, Xt )dXt x

for any s 0.

Section 3.2 - Liu Formula

19

Remark 3.1: Liu formula may also be written as follows, dYt = h h h (t, Xt ) + ut (t, Xt ) dt + vt (t, Xt )dCt . t x x

Example 3.3: Applying Liu formula, we obtain the following formula d(tCt ) = Ct dt + tdCt . Hence we have
s s s

sCs =
0

d(tCt ) =
0

Ct dt +
0

tdCt .

That is,
s s

tdCt = sCs
0 0

Ct dt.

Example 3.4: Let Ct be a standard Liu process. By using Liu formula

2 d(Ct ) = 2Ct dCt ,

we get
s 2 Cs = 0 2 d(Ct ) = 2 0 s s

Ct dCt .

It follows that
0

Ct dCt =

1 2 C . 2 s

Example 3.5: Let Ct be a standard Liu process. Then we have the following chain rule 3 2 d(Ct ) = 3Ct dCt . Thus we obtain
3 Cs = 0 s 3 d(Ct ) = 3 0 s 2 Ct dCt = 0 s 2 Ct dCt .

That is

1 3 C . 3 s

Theorem 3.3 (Liu [39], Integration by Parts) Suppose that Ct is a standard Liu process and F (t) is an absolutely continuous function. Then
s s

F (t)dCt = F (s)Cs
0 0

Ct dF (t).

(3.3)

20

Chapter 3 - Fuzzy Calculus

Proof: By dening h(t, Ct ) = F (t)Ct and using Liu Formula, we get d(F (t)Ct ) = Ct dF (t) + F (t)dCt . Thus F (s)Cs =
0 s s s

d(F (t)Ct ) =
0

Ct dF (t) +
0

F (t)dCt

which is just (3.3).

3.3

Multi-dimensional Cases

In general, there exist multiple fuzzy processes in a fuzzy dynamic system. For instance, there are more than one stock in a market and each price follows geometric Liu process. As an extension, we consider Liu process, Liu integral and Liu formula in multi-dimensional cases. Multi-dimensional Liu Process Denition 3.3 (You [62]) If Cit , i = 1, 2, , m are Liu processes, then Ct = (C1t , C2t , , Cmt ) is called an m-dimensional Liu process. Especially, an m-dimensional Liu process Ct = (C1t , C2t , , Cmt ) is said to be standard if Cit are standard Liu processes for all i. Multi-dimensional Liu Integral Denition 3.4 (You [62]) Let Ct = (C1t , C2t , , Cmt ) be an m-dimensional standard Liu process, and let Vnm denote the set of n m matrices vt = [vijt ], where each entry vijt is an integrable fuzzy process. For a < b, if vt Vnm , then the m-dimensional Liu integral is dened, using matrix notation v11t v12t v1mt dC1t b b v21t v22t v2mt dC2t vt dCt = . . . . . . . . . . . . a a vn1t vn2t vnmt dCmt as the n1 matrix whose ith component is the following sum of Liu integrals:
m b

vijt dCjt .
j=1 a

Section 3.3 - Multi-dimensional Cases

21

Remark 3.2: Let Ct = (C1t , C2t , , Cmt ) be an m-dimensional standard Liu process. For a < b, if vt = (v1t , v2t , , vmt ), where vit are integrable fuzzy processes, then the integral has the form
b m b

vt dCt =
a i=1 a

vit dCit .

Remark 3.3: Let Ct be a standard Liu process. For a < b, if vt = (v1t , v2t )T , where vit are integrable fuzzy processes, then the integral has the form b b v dCt a 1t . vt dCt = b v dCt a a 2t Example 3.6: Let (C1t , C2t ) be an 2-dimensional standard Liu process. Then we have
t

0 t 0 t 0

exp(C1s ) 0 0 exp(C2s )) exp(C1s )dC1s exp(C2s )dC2s =

dC1s dC2s

exp(C1t ) 1 . exp(C2t ) 1

Multi-dimensional Liu Formula In You [62], multi-dimensional Liu formula is given for a dynamic system with multiple fuzzy processes simultaneously. Here, we use the notation dYt to denote (dY1t , dY2t , , dYpt )T . Next, an m-dimensional Liu process is taken into consideration. Theorem 3.4 (You [62]) Let (C1t , C2t , , Cmt ) be an m-dimensional standard Liu process, and let h(t, x1 , x2 , , xn ) be a multivariate continuously dierentiable function. If fuzzy process (X1t , X2t , , Xnt ) is given by dX1t = u1 dt + v11 dC1t + + v1m dCmt dX = u dt + v dC + + v dC 2t 2 21 1t 2m mt . . . . . . . . . dXnt = un dt + vn1 dC1t + + vnm dCmt where ui , vij are absolutely integrable fuzzy processes. Dene Yt = h(t, X1t , X2t , , Xnt ).

22 Then we have dYt =

Chapter 3 - Fuzzy Calculus

h h (t, X1t , X2t , , Xnt )dt + (t, X1t , X2t , , Xnt )dXit t xi i=1

which is called multi-dimensional Liu formula. Proof: Denote Xt = (X1t , X2t , , Xmt ). Indeed, each Xis is bounded on [0, t] by the continuity of the path of Xis , i.e. there exist Mi > 0, such that |Xis | Mi for all s [0, t] and i = 1, 2, , n. As continuous functions, h/t(t, x) and h/xi (t, x) are uniformly continuous and bounded on [0, t] [Mi , Mi ] for all i. It follows from Taylor s theorem that h(t, Xt ) = h(0, X0 ) + = h(0, X0 ) +
j

h(tj , Xj ) h t
m

tj +
i=1 j

h xi

Xij +
j

Rj ,

where h/t, h/xi etc. are evaluated at (tj , X1tj , X2tj , , Xmtj ), tj = tj+1 tj , Xij = Xitj+1 Xitj ,

h(tj , Xj ) = h(tj+1 , Xtj+1 ) h(tj , Xtj ) and Rj = o for all i and j. Denote = supj of Riemann integral that h t tj =
j m

| Xij |2

| tj |2 +
i=1

tj . If

0, it follows from the denition

t

h (tj , Xj ) t

tj
0

h (s, Xs )ds t

a.s.

Since h/xi (t, X) are continuous functions, it follows from Theorem 3.1 that
t

h xi

Xij =
j

h (tj , Xj ) xi

Xij
0

h (s, Xs )dXis xi

a.s.

When

tj 0, we have
j

Rj 0 in a similar proof of Theorem 3.1. Thus,

t m t

h(t, Xt ) = h(0, X0 ) +
0

h (s, Xs )ds + t i=1

h (s, Xs )dXis , xi
0

Section 3.3 - Multi-dimensional Cases

23

which is equivalent to the expression h h (t, X1t , X2t , , Xmt )dt + (t, X1t , X2t , , Xmt )dXit . t xi i=1
m

dXt =

Example 3.7: Let Ct = (C1t , C2t , , Cmt ) be an m-dimensional standard Liu process. Fuzzy processes X1t and X2t are given by dX1t = u1 dt + v11 dC1t + + v1m dCmt dX2t = u2 dt + v21 dC1t + + v2m dCmt where ui , vij are absolutely integrable fuzzy processes. Then we have d(X1t X2t ) = X1t dX2t + X2t dX1t . Example 3.8: Let Ct = (C1t , C2t , C3t ) be a 3-dimensional standard Liu process, and let
2 Xt = (t + C1t + C2t + C3t , C2t C1t C3t ).

It follows from multi-dimensional Liu formula that dXt = dX1t dX2t dt + dC1t + dC2t + dC3t = C3t dC1t + 2C2t dC2t C1t dC3t .

Chapter 4

Fuzzy Dierential Equation

Fuzzy dierential equation was proposed by Liu [39] in 2008 as a type of differential equation driven by Liu process just like that stochastic dierential equation is a type of dierential equation driven by Brownian motion. In addition, You [64] proved the existence and uniqueness theorem for homogeneous fuzzy dierential equation. In this chapter, we introduce the theory of fuzzy dierential equation. The denition of fuzzy dierential equation is given and the solutions of some fuzzy dierential equations are obtained.

4.1

Denition and Examples

Denition 4.1 (Liu [39]) Suppose Ct is a standard Liu process, and f and g are some given functions. Then dXt = f (t, Xt )dt + g(t, Xt )dCt (4.1)

is called a fuzzy dierential equation. A solution is a fuzzy process Xt that satises (4.1) identically in t. Example 4.1: Let Ct be a standard Liu process. Then the fuzzy dierential equation dXt = adt + bdCt has a solution Xt = at + bCt which is just a Liu process with drift coecient a and diusion coecient b. Example 4.2: Let Ct be a standard Liu process. Then the fuzzy dierential equation dXt = aXt dt + bXt dCt

26 has a solution

Chapter 4 - Fuzzy Differential Equation

Xt = exp (at + bCt ) which is just a geometric Liu process.

4.2

Solutions to Some Fuzzy Dierential Equations

Linear Fuzzy Dierential Equation Linear fuzzy dierential equations form a class of fuzzy dierential equations that can be solved explicitly. Denition 4.2 (You [64]) A fuzzy dierential equation with the following form dXt = ( + Xt )dt + ( + Xt )dCt (4.2) is called linear if , , and are constant. Example 4.3: Let (C1t , C2t , , Cnt ) be an n-dimensional standard Liu process, and Xt a fuzzy process dened by
n

dXt = ut Xt dt + Xt
k=1

k dCkt ,

(3.7)

where ut is an absolutely integrable fuzzy process, k and r are constants for all k. We immediately have ln which means
t t n

Xt X0

t n

=
0

us ds +
0 k=1

k dCks

Xt = X0 exp
0

us ds +
0 k=1

k dCkt

Example 4.4: Let Ct be a standard Liu process. Suppose a fuzzy process Xt is dened by dXt = Xt dt + dCt (3.8) where and are constants. Multiplying both sides of (3.8) by the integrating factor exp(t), we have exp(t)dXt exp(t)Xt dt = exp(t)dCt i.e. d (exp(t)Xt ) = exp(t)dCt .

Section 4.2 - Solutions to Some Fuzzy Differential Equations

27

It follows from the integration by parts that

t

exp(t)Xt = X0 + exp(t)Ct +
0

exp(s)Cs ds

i.e. Xt = exp(t) X0 +
0

exp(s)Cs ds + Ct .

General Linear Fuzzy Dierential Equation Denition 4.3 (You [64]) A fuzzy dierential equation with the following form dXt = (t + t Xt )dt + (t + t Xt )dCt (4.3) is called general linear where t , t , t , t are given fuzzy processes, and are continuous functions of t. Example 4.5: Let Ct be a standard Liu process. Then Xt = Ct /(1 + t) is a solution of Xt 1 dXt = dt + dCt . (4.4) 1+t 1+t In fact, it follows from Liu formula that dXt = which is equivalent to (4.4). Example 4.6: Let Ct be a standard Liu process, and ut , vt fuzzy processes. Suppose fuzzy process Xt is dened by dXt = ut dt + vt Xt dCt . (3.9) 1 Ct dt + dCt (1 + t)2 1+t

Multiplying both sides of (3.1.9) by the integrating factor exp(vt Ct ), we have exp(vt Ct )dXt vt Xt exp(vt Ct )dCt = ut exp(vt Ct )dt i.e. d (exp(vt Ct )Xt ) = ut exp(vt Ct )dt. Thus Xt exp(vt Ct ) = X0 +
0 t

us exp(vs Cs )ds,
t

i.e. Xt = exp(vt Ct ) X0 +
0

us exp(vs Cs )ds .

28

Chapter 4 - Fuzzy Differential Equation

Next, we will discuss the solution to a general linear fuzzy dierential equation. Firstly, if fuzzy dierential equation (4.3) degenerates to dXt = t Xt dt + t Xt dCt , (4.5)

where t , t are given fuzzy processes, and are continuous functions of t. Then ln i.e. Xt = X0 exp
0

Xt = X0

s ds +
0 t 0

s dCs
t

s ds +
0

s dCs .

To nd the solution of (4.3), let Xt = Ut Vt (4.6)

where dUt = t Ut dt + t Ut dCt , and dVt = at dt + bt dCt . Set U0 = 1 and V0 = X0 . Taking the dierentials of both sides of (4.6), we have dXt = Ut dVt + Vt dUt by using multi-dimensional Liu formula, i.e. dXt = (Ut at + Vt t Ut )dt + (Ut bt + Vt t Ut )dCt . (4.7)

Comparing (4.7) with (4.3), we can choose coecients at and bt such that Xt = Ut Vt . The desired coecients satisfy equations Ut at = t , and Ut bt = t . It follows from the solution of (4.5) that
t t

Ut = exp
0

s ds +
0 t

s dCs .
t 0

Then Xt is Xt = Ut X0 +
0

s ds + Us

s dCs . Us

Example 4.7: Let Ct be a standard Liu process. Suppose a fuzzy process Xt is dened by dXt = b Xt dt + dCt , 1t 0 t < 1, X0 = a. (3.13)

Then in the same way above, we can deduce that

t

Xt = a(1 t) + bt + (1 t)
0

dCs 1s

is the solution of fuzzy dierential equation (4.2).

Section 4.2 - Solutions to Some Fuzzy Differential Equations

29

Reducible Fuzzy Dierential Equation For certain fuzzy dierential equation, the solution can be found by performing a substitution (change of variables) which reduces the given fuzzy dierential equation to a linear equation. Denition 4.4 (You [64]) A fuzzy dierential equation dXt = f (t, Xt )dt + g(t, Xt )dCt (4.8)

is called reducible if there exists a substitution (change of variables) Yt = U (t, Xt ) such that (4.8) deduces to a linear fuzzy dierential equation dYt = (t + t Yt )dt + (t + t Yt )dCt , where t , t , t , t are chosen as fuzzy processes satisfying the conditions + U = U + U f t t t x t + t U = U g. x Example 4.8: Let Ct be a standard Liu process. Suppose a fuzzy process Xt is dened by dXt = rXt (K Xt )dt + Xt dCt , X0 = x > 0 where K is a positive constant and r, R. Let Yt = (t + 1)/Xt . Then Y0 = x1 and (4.9) reduces to dYt = Thus,
t

(4.9)

r(t + 1) +

1 rk Yt dt Yt dCt . t+1

Yt = (t + 1) exp(rKt Ct ) Y0 +
0

r ds , exp(rKs Cs )

i.e. Xt = exp(rKt + Ct ) x1 +r
t (exp(rKs 0

+ Cs ))ds

Example 4.9: Let Ct be a standard Liu process. Suppose a fuzzy process Xt is dened by dXt = k(a ln Xt )Xt dt + bXt dCt , X0 = x > 0 (4.10)

30

Chapter 4 - Fuzzy Differential Equation

where k, a, b are positive constants. Letting Yt = ln Xt , (4.10) is transformed as dYt = k(a Yt )dt + bdCt . Thus Yt = ekt ln x + a + bekt
0 t

eks dCs ,
t

i.e. Xt = exp ekt ln x + a + bekt

0

eks dCs .

Homogeneous Fuzzy Dierential Equation Denition 4.5 A fuzzy dierential equation with the following form dXt = f (Xt )dt + g(Xt )dCt is called homogeneous where f (x) and g(x) are both functions. (4.11)

4.3

Existence and Uniqueness Theorem

In this section, the existence and uniqueness theorems of homogeneous fuzzy dierential equation are given for certain situations. Theorem 4.1 (You [64] Suppose that f : is a Lipschitz-continuous function. Then there exists a solution of the fuzzy dierential equation dXt = f (Xt )dt + dCt and the solution is unique. Proof: The integral equation
t

(4.12)

Xt = X0 +
0

f (Xs )ds + Ct

(4.13)

is well dened by the continuity of f . Thus the equation (4.12) is equivalent to the equation (4.13). Next, we will try a successive approximation method to construct a solu(0) tion of the equation (4.13). Dene X0 = x, and then Xt
(n+1) t

=x+
0

(n) f (Xs )ds + Ct

(t 0)

(4.14)

for n = 0, 1, 2, . Next write Dt

(n) (n+1) (n) = max Xs Xs , n = 0, 1, 2, . 0st

Section 4.3 - Existence and Uniqueness Theorem

31

Notice that Ct is a continuous fuzzy process, we have Dt

(0) s

= max

0st

f (x)dr + Cs M,
0

for all times 0 t T , where M depends on . Since f is a Lipschitz continuous function, there exists a constant L such that |f (x) f (y)| L|x y|, for all x, y . It follows that Dt
(n) s

= max

0st t

(n) (n1) f (Xr ) f (Xr )dr 0 (n) (n1) Xr Xr dr

L
0 t

L
0 t

(n1) Ds ds

L
0

Ln1 n1 s (n 1)!

by the induction assumption

=M

Ln n t . n!

For m n we have max |Xt

(m)

0tT (n)

Xt | M
k=n

(n)

Lk T k 0, as n . K!

Thus Xt converges uniformly to a limit process Xt , for 0 t T and almost every . It is easy to check that Xt is the solution of (4.13). The existence is proved. Next we will prove that the solution of the fuzzy dierential equation (4.13) is unique. Assume that X1t and X2t are all solutions of (4.13). Then
t t

|X1t X2t | =
0

f (X1s ) f (X2s )
0

L|X1s X2s |ds.

It follows from Gronwall inequality that |X1t X2t | = 0 for almost all , i.e. X1t = X2t . The uniqueness is proved. Theorem 4.2 (You [64]) Suppose that f : is a continuously differential function and |f | L. Then there exists a solution of the fuzzy dierential equation dXt = f (Xt )dt + dCt and the solution is unique.

32

Chapter 4 - Fuzzy Differential Equation

Proof: It follows from the continuity of f that there exists a point x0 such that |f (x) f (y)| = |f (x0 )||(x y)| L|x y|, for any x, y . It implies that f is a Lipschitz continuous function, the result can be obtained from Theorem 4.1. Theorem 4.3 (Existence and Uniqueness Theorem, You [64]) Suppose that g : satises Lipschitzs condition and f : is a function which makes f /g satisfy Lipschitzs condition. Then there exists a solution of the fuzzy dierential equation dXt = f (Xt )dt + g(Xt )dCt , and the solution is unique. Proof: First, let us solve the ordinary dierential equation u (z) = g(u(z)), u(y) = x. (4.16) (4.15)

Since g is a Lipschitz continuous function, the solution of the equation (4.16) exists and is unique. Without loss of generality, denote the solution of (4.16) by u(x). Letting Xt = u(Yt ), it follows from Liu formula that dXt = u (Yt )dYt = g(u(Yt ))dYt = g(Xt )dYt . Comparing (4.11) with (4.17), we have dYt = f (Xt ) dt + dCt , g(Xt ) Y0 = y. (4.18) (4.17)

Since f /g is a Lipschitz continuous function, according to Theorem 4.1, the solution of the fuzzy dierential equation (4.18) exists and is unique. Then the solution of the homogeneous fuzzy dierential equation (4.11) exists and is unique.

Chapter 5

The Stability of Fuzzy Dierential Equations

5.1 Some Denitions of Stability

Denition 5.1 The solution of stochastic dierential equation dXt = f(t, Xt )dt + g(t, Xt )dBt is said to be stable almost surely with respect to initial value if for any given numbers > 0 and > 0, there is a number > 0 such that for any two solutions Xt and Yt , we have Cr{sup|Xt Yt | > } <
t0

whenever |X0 Y0 | < . Denition 5.2 The solution of stochastic dierential equation dXt = f(t, Xt )dt + g(t, Xt )dBt is said to be stable respect to the triple (Q, P, ) if x Q implies that Pr{Xt P, t 0} 0. Most often we consider the upper bounds of Cr{supV (Xt ) > 0},
t0

where V (x) is a stochastic Liapunov function.

34

Chapter 5 - The Stability of Fuzzy Differential Equations

Denition 5.3 The solution of stochastic dierential equation dXt = f(t, Xt )dt + g(t, Xt )dBt is said to be stable in probability with respect to initial value if for any given numbers > 0 and > 0, there is a number > 0 such that for any two solutions Xt and Yt , we have Cr{|Xt Yt | > } < whenever |X0 Y0 | < . Denition 5.4 The solution of stochastic dierential equation dXt = f(t, Xt )dt + g(t, Xt )dBt is said to be asymptotically stable almost surely with respect to initial value if for any given numbers > 0 and > 0, there is a number > 0 such that for any two solutions Xt and Yt , we have Cr{sup|Xt Yt | > } < and Cr{ lim |Xt Yt | = 0} = 1
t0 t

whenever |X0 Y0 | < . Denition 5.5 The solution of stochastic dierential equation dXt = f(t, Xt )dt + g(t, Xt )dBt is said to be Equidistance Bounded Almost Surely with respect to initial value if for any two solutions Xt and Yt , we have
0+

lim Cr{sup|Xt Yt | > } = 0

t0

uniformly in X0 and Y0 . Denition 5.6 The solution of stochastic dierential equation dXt = f(t, Xt )dt + g(t, Xt )dBt is said to be equistable bounded almost surely with respect to initial value if it satises Equidistance Bounded Almost Surely and for any given number > 0, such that for any two solutions Xt and Yt , we have Cr{sup|Xt Yt | > } 0
t0

as |X0 Y0 | 0, uniformly in X0 and Y0 .

5.2

Have Some Try

Chapter 6

Fuzzy Stock Model

Fuzzy calculus was introduced to nance by Liu [39] in 2008. He assumed that stock prices follow geometric Liu process. Based on this assumption, Lius stock model was formulated to describe fuzzy nancial market. Qin and Li [50] rst deduced option pricing formula for European options. In addition, Lius stock model was extended to generalized and multi-factor cases by Gao and Chen [14] and Gao [12], respectively. In this chapter, we rst explain the necessity to introduce fuzziness to nancial market. Consequentially, we introduce Lius stock model which consists of riskless cash bond and a risky tradable stock whose price follows geometric Liu process. In what follows, we consider option pricing problems for European options, American options, Asian options and varieties of exotic options.

6.1

Why Fuzziness?

In our life, some unexpected incidents often occurs for instance the outbreak of war, terrorist attacks and so on. When such events appear, existing historical data will not fully describe stock prices. In these situations, human factors are more important. In addition, companys bankruptcy and merger or consolidation between companies often take place in business. This also will inuence the stock prices of participating companies. Thus, a fuzzy process will be meaningful in the situation with lack of historical data.

6.2

Lius Stock Model

It was assumed that stock price follows geometric Brownian motion, and stochastic nancial mathematics was then founded based on this assumption. Liu [39] presented an alternative assumption that stock price follows geometric Liu process. Based on this assumption, we obtain a basic stock

36

Chapter 6 - Fuzzy Stock Model

model for fuzzy nancial market in which the bond price Xt and the stock price Yt follow dXt = rXt dt (6.1) dYt = eYt dt + Yt dCt where r is the riskless interest rate, e is the stock drift, is the stock diusion, and Ct is a standard Liu process. It is just a fuzzy counterpart of BlackScholes stock model [3]. It is reasonable to assume that the stock price follows geometric Liu process. To see this, for any given positive integer n, suppose that Ytk is the price of some stock at time tk where tk = k/n for k = 0, 1, 2, , n2 . Generally speaking, the percentage changes of stock price are independent and identically distributed. Let Ztk = Ytk /Ytk1 . Then Ztk are independent and identically distributed for k = 1, 2, , n2 . Obviously, Ytk = Ztk Ytk1 . Iterating this equality gives Ytk = Ztk Ztk1 Zt1 Yt0 . Thus, we have
k

ln(Ytk ) =
i=1

ln(Zti ) + ln(Yt0 ).

Assume that ln(Ztk ) is a normal fuzzy variable for each k. Since ln(Ztk ) are independent and identically distributed for k = 1, 2, , n2 , letting n , ln(Ytk ) will be approximately a Liu process, and Ytk will be approximately a geometric Liu process.

6.3

European Options

European Call Option A European call option gives the holder the right, but not the obligation, to buy a stock at a specied time for a specied price. Considering Lius stock model, we assume that a European call option has strike price K and expiration time T . If YT is the nal price of the underlying stock, then the payo from buying a European call option is (YT K)+ . Considering the time value of money, the present value of this payo is exp(rT )(YT K)+ . Therefore, the below denition is reasonable. Denition 6.1 (Qin and Li [52]) European call option price f for Lius stock model is dened as f (Y0 , K, e, , r) = exp(rT )E[(Y0 exp(eT + CT ) K)+ ] where K is the strike price at expiration time T . (6.2)

Section 6.3 - European Options

37

In order to calculate this European call option price, we solve Equation (6.2) and give an integral form as follows: Theorem 6.1 (Qin and Li [52]) European call option price formula for Lius stock model is
+

f (Y0 , K, e, , r) = Y0 exp(rT )
K/Y0

1 1 + exp
6T

dx. (6.3) (ln x eT )

Proof: By the denition of expected value of fuzzy variable, we have f (Y0 , K, e, , r) = exp(rT )E[(Y0 exp(eT + CT ) K)+ ]
+

= exp(rT )
0 +

Cr{(Y0 exp(eT + CT ) K)+ x}dx Cr{Y0 exp(eT + CT ) K x}dx

0 +

= exp(rT ) = Y0 exp(rT )

Cr{exp(eT + CT ) u}du
K/Y0 +

exp exp
e 6

= Y0 exp(rT )
K/Y0 +

e 6

+ exp 1

ln x 6T

dx

= Y0 exp(rT )
K/Y0

1 + exp

6T

dx. (ln x eT )

Theorem 6.2 (Qin and Li [52]) European call option formula f = f (Y0 , K, e, , r) has the following properties: (a). f is an increasing and convex function of Y0 ; (b). f is a decreasing and convex function of K; (c). f is an increasing function of e; (d). f is an increasing function of ; (e). f is a decreasing function of r. Proof: (a). This property means that if the other four variables remain unchanged, then the option price is an increasing and convex function of the stocks initial price. To prove it, rst note that for any positive constant a, the function exp(rT )(Y0 a K)+ is an increasing and convex function of Y0 . Consequently, the quantity exp(rT )(Y0 exp(et + CT ) K)+ is increasing and convex in Y0 . Since the credibility distribution of exp(eT + CT ) does not depend on Y0 , the desired result is veried. (b). This follows from the fact that exp(rT )(Y0 exp(eT + CT ) K)+ is decreasing and convex in K. It means that European call option price is a decreasing and convex function of the stocks strike price when the other four variables remain unchanged.

38

Chapter 6 - Fuzzy Stock Model

(c). At rst, it is obvious that exp((ln x eT )/( 6T )) is a decreasing function of e. Therefore, the integrand 1/(1 + exp((ln x eT )/( 6T ))) is an increasing function of e. According to the properties of integral, the result is veried. This means that European call option price will increase with the stock drift. (d). This follows from the fact that the integrand 1/(1 + exp((ln x eT )/( 6T ))) is an increasing function of immediately. This property means that European call option price will increase with the stock diusion. (e). Since exp(rT ) is a decreasing function of r and the expected value is independent of r, the result is veried. This means that European call option price will decrease with the riskless interest rate. In essential, European call option price is a generalized integral. Considering the complexity of the integrand, we can employ numerical integral techniques to calculate it in real life. Example 6.1: Suppose that a stock is presently selling for a price of Y0 = 30, the riskless interest rate r is 8% per annum, the stock drift e is 0.06 and the stock diusion is 0.25. We would like to nd a European call option price that expires in three months and has a strike price of K = 34. To calculate this European call option price, the following MATLAB codes may be employed in a personal computer: syms x; y=30*exp(-0.08*0.25)./ (1+exp((log(x)-0.06*0.25)*pi/(sqrt(6)*0.25*0.25))); f=quad(y,34/30,100) The calculation result shows that f = 0.1696. This means the appropriate call option price in the example is about 17 cents. European Put Option A European put option gives the holder the right, but not the obligation, to sell a stock at a specied time for a specied price. Suppose that there is a European put option with strike price K and expiration time K in Lius stock model. If YT is the nal price of the underlying stock, then the payo from buying a European put option is (K YT )+ . Considering the time value of money, the denition is given as follows: Denition 6.2 (Qin and Li [52]) European put option price f for Lius stock model is dened as f (Y0 , K, e, , r) = exp(rT )E[(K Y0 exp(eT + CT ))+ ] where K is the strike price at expiration time T . (6.4)

Section 6.4 - American Options

39

Theorem 6.3 (Qin and Li [52])European put option price formula for Lius stock model is
K/Y0

f (Y0 , K, e, , r) = Y0 exp(rT )
0

1 1 + exp
6T

dx. (eT ln x)

Proof: According to the denition of expected value of fuzzy variable, we have f (Y0 , K, e, , r) = exp(rT )E[(K Y0 exp(eT + CT ))+ ]
+

= exp(rT )
0 +

Cr{(K Y0 exp(eT + CT ))+ x}dx Cr{Y0 exp(eT + CT ) K x}dx

0 K/Y0

= exp(rT ) = Y0 exp(rT )

Cr{exp(eT + CT ) u}du
K/Y0

= Y0 exp(rT )
0 K/Y0

Cr{exp(eT + CT ) u}du 1 1 + exp

6T

= Y0 exp(rT )
0

dx. (eT ln x)

Theorem 6.4 (Qin and Li [52]) European put option formula f = f (Y0 , K, e, , r) has the following properties: (a). f is a decreasing and convex function of Y0 ; (b). f is an increasing and convex function of K; (c). f is an increasing function of e; (d). f is an increasing function of ; (e). f is a decreasing function of r. Proof: The proof is similar to that of Theorem 6.2. Example 6.2: Suppose that a stock is presently selling for an initial price Y0 = 30, the riskless interest rate r is 8% per annum, the stock drift e is 0.06 and the stock diusion is 0.25. Find a European put option price that expires in three months and has a strike price of K = 29. The following MATLAB codes may be employed to calculate European put option price: syms x; y=30*exp(-0.08*0.25)./ (1+exp((0.06*0.25-log(x))*pi/(sqrt(6)*0.25*0.25))); f=quad(y,0,29/30) The result shows that f = 0.4109. This means the appropriate put option price is about 41 cents.

40

Chapter 6 - Fuzzy Stock Model

6.4

American Options

Denition 6.3 American call option price f for Lius stock model is dened as f = max E[exp(rt)(Yt K)+ ]
0tT

(6.5)

where K is the strike price at expiration time T . Denition 6.4 American put option price f for Lius stock model is dened as f = max E[exp(rt)(K Yt )+ ]
0tT

(6.6)

where K is the strike price at expiration time T .

6.5

Asian Options

Asian options are options where the terminal payo is a function of the average of the stock price over the lifetime of the option. We consider the pricing problem of asian call option with the strike price K and maturity time T . Denition 6.5 Asian call option price f for Lius stock model is dened as + T 1 f = E exp(rT ) (6.7) Yt dt K T 0 where K is the strike price at expiration time T . Theorem 6.5 The computational form of Asian call option price (6.5) is f= 1 exp(rT ) T
+ T

Cr
TK 0

Yt dt x dx.

(6.8)

Proof: By the denition of expected value of fuzzy variable, we have f = exp(rT )E 1 exp(rT ) T 1 T
+ t +

Yt dt K
0 T

Cr
TK 0

Yt dt x dx.

Section 6.6 - Exotic Options

41

Denition 6.6 Asian put option price f for Lius stock model is dened as f = E exp(rT ) 1 T K
0 T +

(6.9)

Yt dt

where K is the strike price at expiration time T . Theorem 6.6 The computational form of Asian call option price (6.6) is f= 1 exp(rT ) T
TK T

Cr
0 0

Yt dt x dx.

(6.10)

Proof: By the denition of expected value of fuzzy variable, we have f = exp(rT )E K 1 exp(rT ) T
TK

1 T

Yt dt
0 T

Cr
0 0

Yt dt x dx.

6.6

Exotic Options

Digital Options Digital options are options where the payo is given by a Heaviside function. We consider the price of digital options. First, dene IT = 1, if YT K 0, if YT < K.

Denition 6.7 The price of a digital call option with the strike price K and maturity time T is dened as f = exp(rT )E [M IT ] where M is a xed amount. Theorem 6.7 The computational form of digital call option price (6.11) is f = M exp(rT )Cr CT ln K eT . (6.12) (6.11)

42

Chapter 6 - Fuzzy Stock Model

Proof: It follows from the denition of expected value of fuzzy variable that
+

f = exp(rT )
0

Cr {M IT x} dx
1

= M exp(rT )
0

Cr {IT x} dx

= M exp(rT )Cr{YT K} = M exp(rT )Cr Ct ln K eT .

Dention 6.8 The price of a digital put option with the strike price K and maturity time T is dened as f = exp(rT )E [M (1 IT )] where M is a xed amount. Theorem 6.8 The computational form of digital put option price (6.13) is f = M exp(rT )Cr CT < ln K eT . (6.14) (6.13)

Proof: It follows from the denition of expected value that

+

f = exp(rT )
0

Cr {M (1 IT ) x} dx
1

= M exp(rT )
0 1

Cr{1 IT x}dx Cr{IT x}dx

0

= M exp(rT )

= M exp(rT )Cr CT < Lookback Options

ln K eT

A lookback call option gives the holder the right to buy a unit of stock at time T for a price equal to the minimum achieved by the stock up to time T . Denition 6.9 The price of a lookback call option is dened as f = E YT min Yt
0tT

(6.15)

where Yt is the underlying stock price.

Section 6.7 - Generalized Lius Stock Model

43

A lookback put option gives the holder the right to sell a unit of stock at time T for a price equal to the maximum achieved by the stock up to time T. Denition 6.10 The price of a lookback put option is dened as f =E max Yt YT (6.16)

0tT

where Yt is the underlying stock price.

6.7

Generalized Lius Stock Model

Let Ct be a standard Liu process, and let et and t be functions of t. Then the fuzzy dierential equation dYt = et Yt dt + t Yt dCt has the solution
t t

Yt = Y0 exp
0

es ds +
0

s dCs ,

which is called the generalized geometric Liu process. The stock price given by Yt has instantaneous stock drift et and stock diusion t . Both the instantaneous stock drift and stock diusion are allowed to be time-varying. This process includes all possible models of a stock price process that is always positive, has no jumps, and is driven by a single standard Liu process. If e and are constant, it degenerates into Lius stock model. When the interest rate is time-varying denoted by r(t), and the stock price is a generalized geometric Liu process, Gao and Chen [14] gave a new stock model for fuzzy nancial market in which the bond price Xt and the stock price Yt follow: dXt = rt Xt dt (6.17) dYt = et Yt dt + t Yt dCt which is called as the generalized stock model. Next, we study European option pricing problems for generalized Lius stock model. Theorem 6.9 (Gao and Chen [14]) European call option price f for generalized Lius stock model has the following form
T + T

f = Y0 exp
0

(et rt )dt
L

Cr exp
0

t dCt

u du

44 where L = K exp
T 0

Chapter 6 - Fuzzy Stock Model

et dt /Y0 .

Theorem 6.10 (Gao and Chen [14]) European put option price f for generalized Lius stock model has the following form
T L T

f p = Y0 exp
0

(et rt )dt
T 0

Cr exp
0

t dCt

u du

where L = K exp

et dt /Y0 .

6.8

Multi-factor Lius Stock Model

The mathematical denition of fuzzy nancial market was given by Gao [12]. Denition 6.11 (Gao [12]) A fuzzy nancial market is (m+1)-dimensional fuzzy process (Xt , Y1t , , Ymt ) having the form dXt = rXt dt,
n

dYit = ei Yit dt +

ij Yit dCjt , i = 1, , m
j=1

(6.18)

where r is the riskless interest rate, ei is the drift of the ith stock drift, (ij )n j=1 is its diusion vector, and Cjt , j = 1, 2, , n are independent standard Liu processes. As each stock has a diusion vector, the collection of m such vectors forms a diusion matrix M = (ij )mn . No-Arbitrage Denition 6.12 (Gao [12]) The fuzzy nancial market (6.18) is no-arbitrage if there is no portfolio (0t , 1t , , nt ) such that for some time T > 0, Cr{exp(rT )VT V0 } = 1 and Cr{exp(rT )VT > V0 } > 0 where Vt = t X0t + 1t Y1t + + nt Ynt . Theorem 6.11 (No-Arbitrage Determinant Theorem, Gao [12]) The fuzzy nancial market (6.18) is no-arbitrage if and only if its diusion matrix M = (ij )mn satises rank(M ) = m. (6.20) (6.19)

Section 6.8 - Multi-factor Lius Stock Model

45

Proof: The dierential of the discounted portfolio value is d (exp(rt)Vt ) = exp(rt) (dVt rVt dt)
m

= exp(rt) 0t +
i=1

it dYit rVt dt
m

= exp(rt) r Vt
i=1 m

it Yit
n

dt

it Yit ei dt +

+
i=1

ij dCjt rVt dt
j=1 m n

= exp(rt)

ij dCjt

it Yit (ei r)dt +

i=1 i=1 n m

it Yit
j=1 m

= exp(rt)

it ij Yit dCjt .

it Yit (ei r)dt +

i=1 m j=1 i=1

Linear system of equations i=1 it ij = 0, j = 1, 2, , n can be represented in matrix form as the matrix equation M t = 0, where M is the transpose matrix of M , t is the portfolio vector. Since we have rank(M ) = rank(M ) = m, the system has a unique solution t = 0. In other words, there is no non-zero portfolio such that for some time T > 0, Cr{exp(rT )VT V0 } = 1. The proof is complete. Corollary 6.1: Lius stock model dXt = rXt dt (6.21) dYt = eYt dt + Yt dCt . is no arbitrage. The diusion matrix degenerates into , so the market described by Lius stock model is no-arbitrage. Corollary 6.2: The diusion matrix = (ij )mn satises that each row is non-zero and each column has at most one non-zero element. The rank of the diusion matrix is m, so this market is no-arbitrage.

Chapter 7

Fuzzy Control System

Appendix A

Stochastic Calculus
Brownian Motion Denition A.1 A stochastic process Xt is said to have independent increments if Xt1 Xt0 , Xt2 Xt1 , , Xtk Xtk1 (A.1) are independent random variables for any times t0 < t1 < < tk . A stochastic process Xt is said to have stationary increments if, for any given t > 0, the increments Xs+t Xs are identically distributed random variables for all s > 0. Denition A.2 A stochastic process Bt is said to be a Brownian motion (also called Wiener process) if (i) B0 = 0 and Bt is sample-continuous, (ii) Bt has stationary and independent increments, (iii) every increment Bs+t Bs is a normally distributed random variable with expected value et and variance 2 t. The parameters e and are called the drift and diusion coecients, respectively. The Brownian motion is said to be standard if e = 0 and = 1. Any Brownian motion may be represented by et+Bt where Bt is a standard Brownian motion. Example A.1: Let Bt be a Brownian motion with drift 0. Then for any level x > 0 and any time t > 0, we have Pr max Bs x = 2 Pr{Bt x} (A.2)

0st

which is the so-called reection principle. For any level x < 0 and any time t > 0, we have Pr
0st

min Bs x

= 2 Pr{Bt x}.

(A.3)

50

Appendix A - Stochastic Calculus

Example A.2: Let Bt be a Brownian motion with drift e > 0 and diusion coecient . Then the rst passage time that the Brownian motion reaches the barrier x > 0 has the probability density function (t) = x (x et)2 exp 2 2 t 2t3 , t>0 (A.4)

whose expected value and variance are E[ ] = x , e V [ ] = x 2 . e3 (A.5)

However, if the drift e = 0, then the expected value E[ ] is innite. Denition A.3 Let Bt be a standard Brownian motion. Then et + Bt is a Brownian motion, and the stochastic process Gt = exp(et + Bt ) is called a geometric Brownian motion. Geometric Brownian motion Gt is an important model for stock prices. For each t > 0, the Gt has a lognormal distribution whose probability density function is (ln z et)2 1 , z0 (A.7) (z) = exp 2 2 t 2t and has expected value and variance as follows, E[Gt ] = exp et + 2 t/2 , V [Gt ] = exp(2et + 2 2 t) exp(2et + 2 t). In addition, the rst passage time that a geometric Brownian motion Gt reaches the barrier x > 1 is just the time that the Brownian motion with drift e and diusion reaches ln x. Stochastic Calculus Let Bt be a standard Brownian motion, and dt an innitesimal time interval. Then dBt = Bt+dt Bt is a stochastic process such that, for each t, the dBt is a normally distributed random variable with E[dBt ] = 0,
2 E[dBt ] = dt,

(A.6)

V [dBt ] = dt,
2 V [dBt ] = 2dt2 .

Appendix A - Stochastic Calculus

51

Denition A.4 Let Xt be a stochastic process and let Bt be a standard Brownian motion. For any partition of closed interval [a, b] with a = t1 < t2 < < tk+1 = b, the mesh is written as = max |ti+1 ti |.
1ik

Then the Ito integral of Xt with respect to Bt is

b k

Xt dBt = lim
a

Xti (Bti+1 Bti )

i=1

(A.8)

provided that the limit exists in mean square and is a random variable. Theorem A.1 (Ito Formula) Let Bt be a standard Brownian motion, and let h(t, b) be a twice continuously dierentiable function. Suppose that stochastic process Xt is derived by dXt = ut dt + vt dBt where ut is an absolutely integrable stochastic process, and vt is a square integrable stochastic process. Dene Yt = h(t, Xt ). Then we have the following chain rule dh(t, Yt ) = h 1 2h h 2 (t, Yt )dt + (t, Yt )dYt + (t, Yt )vt dt t b 2 b2 (A.9)

which is called Ito formula. Remark A.1: Assume that B1t , B2t , , Bmt are standard Brownian motions, and h(t, b1 , b2 , , bm ) is a twice continuously dierentiable function. Dene Xt = h(t, B1t , B2t , , Bmt ). Then we have the following multi-dimensional Ito formula dXt = h h 1 dt + dBit + t bi 2 i=1
m m

i=1

2h dt. b2 i

(A.10)

Example A.3: Ito formula is the chain rule for dierentiation. Applying Ito formula, we obtain d(tBt ) = Bt dt + tdBt . Hence we have
s s s

sBs =
0

d(tBt ) =
0 s

Bt dt +
0 s

tdBt .

That is,
0

tdBt = sBs
0

Bt dt.

52

Appendix A - Stochastic Calculus

Theorem A.2 (Integration by Parts) Suppose that Bt is a standard Brownian motion and F (t) is an absolutely continuous function. Then
s s

F (t)dBt = F (s)Bs
0 0

Bt dF (t).

(A.11)

Proof: By dening h(t, Bt ) = F (t)Bt and using the Ito formula, we get d(F (t)Bt ) = Bt dF (t) + F (t)dBt . Thus F (s)Bs =
0 s s s

d(F (t)Bt ) =
0

Bt dF (t) +
0

F (t)dBt

which is just (A.11). Stochastic Dierential Equation This section introduces a type of stochastic dierential equations driven by Brownian motion. Denition A.5 Suppose Bt is a standard Brownian motion, and f and g are some given functions. Then dXt = f (t, Xt )dt + g(t, Xt )dBt (A.12)

is called a stochastic dierential equation. A solution is a stochastic process Xt that satises (A.12) identically in t. Example A.4: Let Bt be a standard Brownian motion. Then the stochastic dierential equation dXt = adt + bdBt has a solution Xt = at + bBt which is just a Brownian motion with drift coecient a and diusion coecient b. Example A.5: Let Bt be a standard Brownian motion. Then the stochastic dierential equation dXt = aXt dt + bXt dBt has a solution Xt = exp a b2 2 t + bBt

which is just a geometric Brownian motion.

Appendix B

Fuzzy Renewal Process

In this appendix, we recall some concepts and properties of fuzzy renewal process which was rst investigated in Zhao and Liu [69]. Denition B.1 (Zhao and Liu [69]) Let 1 , 2 , be iid positive fuzzy variables. Dene S0 = 0 and Sn = 1 + 2 + + n for n 1. Then the fuzzy process (B.1) Nt = max n Sn t
n0

is called a fuzzy renewal process. If 1 , 2 , denote the interarrival times of successive events. Then Sn can be regarded as the waiting time until the occurrence of the nth event, and Nt is the number of renewals in (0, t]. Each sample path of Nt is a right-continuous and increasing step function taking only nonnegative integer values. Furthermore, the size of each jump of Nt is always 1. In other words, Nt has at most one renewal at each time. In particular, Nt does not jump at time 0. Since Nt n if and only if Sn t, we have Cr{Nt n} = Cr{Sn t} = Cr 1 t n . (B.2)

Theorem B.1 Let Nt be a fuzzy renewal process with interarrival times 1 , 2 , Then we have

E[Nt ] =
n=1

Cr{Sn t} =
n=1

Cr 1

t n

(B.3)

Example B.1: A renewal process Nt is called an equipossible renewal process if 1 , 2 , are iid equipossible fuzzy variables (a, b) with a > 0. Then for

54

Appendix B - Fuzzy Renewal Process

each nonnegative integer n, we have 0, if t < na 0.5, if na t < nb Cr{Nt n} = 1, if t nb, E[Nt ] = 1 2 t t + a b

(B.4)

(B.5)

where x represents the maximal integer less than or equal to x. Example B.2: A renewal process Nt is called a triangular renewal process if 1 , 2 , are iid triangular fuzzy variables (a, b, c) with a > 0. Then for each nonnegative integer n, we have 0, if t na t na if na t nb 2n(b a) , (B.6) Cr{Nt n} = nc 2nb + t 2n(c b) , if nb t nc 1, if t nc. Theorem B.2 (Zhao and Liu [69], Renewal Theorem) Let Nt be a fuzzy renewal process with interarrival times 1 , 2 , Then lim E[Nt ] 1 =E . t 1 (B.7)

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List of Frequently Used Symbols

, , , , Xt , Yt , Zt Nt Bt Ct , Cr Pr E (, A, Pr) (, P, Cr)
n

fuzzy variables fuzzy vectors fuzzy process, stochastic process fuzzy renewal process Brownian motion Liu process membership functions empty set credibility measure probability measure expected value probability space credibility space set of real numbers set of n-dimensional real vectors maximum operator minimum operator

Index
Brownian motion, 49 credibility inversion theorem, 4 credibility measure, 1 credibility space, 2 expected value, 6 fuzzy variable, 2 fuzzy dierential equation, 25 fuzzy renewal process, 53 Ito formula, 51 Ito integral, 50 Liu formula, 18 Liu integral, 17 Lius stock model, 35 membership function, 2 reected principle, ?? stochastic dierential equations, 52