Truncated variation, upward truncated variation and downward truncated variation of Brownian motion with drift -- their characteristics and applications (Q550141): Difference between revisions

Let \((W_t)_{t\geq 0}\) be a Brownian motion with drift. The author investigates the truncated variation of \(W_t\) at the level \(c>0\) on the interval \([a,b]\) \[ TV^c[a,b]:=\sup_{n}\sup_{a\leq t_1<t_2<\dots<t_n\leq b}\sum_{i=1}^{n-1}\max(|W_{t_{i+1}}-W_{t_i}|-c,0), \] its upward and downward versions defined, respectively, by \[ UTV^c[a,b]:=\sup_{n}\sup_{a\leq t_1<s_1<t_2<s_2<\dots<t_n<s_n\leq b}\sum_{i=1}^n \max(W_{s_i}-W_{t_i}-c,0) \] and \[ DTV^c[a,b]:=\sup_{n}\sup_{a\leq t_1<s_1<t_2<s_2<\dots<t_n<s_n\leq b}\sum_{i=1}^n \max(W_{t_i}-W_{s_i}-c,0). \] These modified variations neglect small increments of \((W_t)\) which make them almost surely finite. Furthermore, the author proves that the characteristic functions of these quantities can be extended to entire functions. Also, an explicit formula is found for \[ \int_{[0,\,\infty)}e^{vt}L(\lambda, t)\,dt, \] where \(L(\lambda, t)\) is the moment generating function (in \(\lambda\)) of \(UTV^c[0,t]\), and some consequences of it are discussed. The paper closes with an interpretation of the upward truncated variation in financial mathematics.