Exponential Martingales and Time integrals of Brownian Motion

arXivmath/0612034MaRDI QIDQ6478348FDOQ6478348

Victor W. Goodman, Kyounghee Kim

Publication date: 1 December 2006

Abstract: We find a simple expression for the probability density of $intexp(B_s-s/2)ds$ in terms of its distribution function and the distribution function for the time integral of $exp(B_s+s/2)$. The relation is obtained with a change of measure argument where expectations over events determined by the time integral are replaced by expectations over the entire probability space. We develop precise information concerning the lower tail probabilities for these random variables as well as for time integrals of geometric Brownian motion with arbitrary constant drift. In particular, $$ is finite iff $heta<2$. We present a new formula for the price of an Asian call option.

Mathematics Subject Classification ID

Brownian motion (60J65) Applications of stochastic analysis (to PDEs, etc.) (60H30)

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