A proof of Dassios' representation of the \(\alpha\)-quantile of Brownian motion with drift (Q1909401): Difference between revisions

Let \(X\) be a real-valued Brownian motion with drift. Define for \(0 \leq \alpha \leq 1\) \[ M(\alpha, t) = \inf \Biggl\{ x : \int^1_0 1_{\{X_s \leq x\}} ds > \alpha t \Biggr\}, \] the \(\alpha\)-quantile of the occupation measure of \(X\) on the time interval \([0,t]\). Motivated by questions in mathematical finance on the pricing of options, \textit{A. Dassios} [ibid. 5, No. 2, 389-398 (1995; Zbl 0837.60076)] observed the following striking identity in law: \[ M(\alpha, t) \overset {(d)} = \sup_{0 \leq s \leq \alpha t} X_s + \inf_{0 \leq s \leq (1 - \alpha)t} X_s', \tag{*} \] where \(X'\) is an independent copy of \(X\). As a matter of fact, a discrete time version of this identity has been previously proven by \textit{J. G. Wendel} [Ann. Math. Stat. 31, 1034-1044 (1960; Zbl 0118.33701)] and \textit{S. C. Port} [J. Math. Anal. Appl. 6, 109-151 (1963; Zbl 0114.34101)] in their study of ordered statistics of partial sums. The paper under review contains two proofs of the identity (*). The first relies on the celebrated identity of Sparre Andersen, and the second on a path decomposition of Brownian motion with drift which extends an earlier result of the reviewer [in: Séminaire de probabilités XXV, Lect. Notes Math. 1485, 330-344 (1991; Zbl 0741.60077)]. More recently, the latter approach has been extended by \textit{Chaumont, M. Yor} and the reviewer [``Two chain-transformations and their applications to quantiles'' (to appear in J. Appl. Probab.)] to explain a more general version of (*).