Truncated variation, upward truncated variation and downward truncated variation of Brownian motion with drift -- their characteristics and applications

DOI10.1016/J.SPA.2010.10.005zbMATH Open1235.60112arXiv0912.4533OpenAlexW2164905656MaRDI QIDQ550141FDOQ550141

Rafał M. Łochowski

Publication date: 8 July 2011

Published in: Stochastic Processes and their Applications (Search for Journal in Brave)

Abstract: In the paper "On Truncated Variation of Brownian Motion with Drift" (Bull. Pol. Acad. Sci. Math. 56 (2008), no.4, 267 - 281) we defined truncated variation of Brownian motion with drift, $W_t=B_t+mut,tgeq0,$ where $(B_t)$ is a standard Brownian motion. Truncated variation differs from regular variation by neglecting jumps smaller than some fixed $c>0$. We prove that truncated variation is a random variable with finite moment-generating function for any complex argument. We also define two closely related quantities - upward truncated variation and downward truncated variation. The defined quantities may have some interpretation in financial mathematics. Exponential moment of upward truncated variation may be interpreted as the maximal possible return from trading a financial asset in the presence of flat commission when the dynamics of the prices of the asset follows a geometric Brownian motion process. We calculate the Laplace transform with respect to time parameter of the moment-generating functions of the upward and downward truncated variations. As an application of the obtained formula we give an exact formula for expected value of upward and downward truncated variations. We give also exact (up to universal constants) estimates of the expected values of the mentioned quantities.

Full work available at URL: https://arxiv.org/abs/0912.4533

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zbMATH Keywords

Laplace transformBrownian motionmoment generating function

Mathematics Subject Classification ID

Gaussian processes (60G15) Brownian motion (60J65)

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Cited In (4)

• On the double Laplace transform of the truncated variation of a Brownian motion with drift
• Integrability and concentration of the truncated variation for the sample paths of fractional Brownian motions, diffusions and Lévy processes
• The play operator, the truncated variation and the generalisation of the Jordan decomposition
• On Truncated Variation of Brownian Motion with Drift

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