Joint densities of first hitting times of a diffusion process through two time-dependent boundaries

Stopping times; optimal stopping problems; gambling theory (60G40) Continuous-time Markov processes on general state spaces (60J25) Diffusion processes (60J60) Numerical methods for integral equations (65R20)

Abstract: Consider a one dimensional diffusion process on the diffusion interval

I

originated in

x_{0} i n I

. Let

a (t)

and

b (t)

be two continuous functions of

t

,

t > t_{0}

with bounded derivatives and with

a (t) < b (t)

and

a (t), b (t) i n I

,

f o r a l l t > t_{0}

. We study the joint distribution of the two random variables

T_{a}

and

T_{b}

, first hitting times of the diffusion process through the two boundaries

a (t)

and

b (t)

, respectively. We express the joint distribution of

T_{a}, T_{b}

in terms of

P (T_{a} < t, T_{a} < T_{b})

and

P (T_{b} < t, T_{a} > T_{b})

and we determine a system of integral equations verified by these last probabilities. We propose a numerical algorithm to solve this system and we prove its convergence properties. Examples and modeling motivation for this study are also discussed.

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