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Mathematics and Statistics
Assignment 1: Stochastic Analysis
MATH4512
1. Let τ be an exponentially distributed random variable, so P(τ > t) = e−λt for some λ > 0 and
each t ∈ [0,∞).
(a) Let Ft = σ(1{τ≤s} : s ≤ t), and show that τ is an (Ft)t stopping time.
(b) Find an expression for E[τ |Ft].
(c) Are either τ2 or
√
τ also (Ft)t stopping times? Justify your answer.
2. Let (Wt,Ft) be a Brownian motion.
(a) Find the distribution of random variable 5W1 −W3 +W7.
(b) For what values of parameters a, b ∈ R, the random variable aW1 −W2 and W3 + bW5
are independent?
3. Let (Wt,Ft)t∈[0,1] be a Brownian motion and define
Ht =
(
(1 + t)W 1
1+t
−W1
)
t≥0
.
Show that (Ht,Ht)t≥0 is a Brownian motion, where the filtration (Ht)t should be specified.
4. For a stopping time τ we define a σ-algebra Fτ by
Fτ = {A ∈ F : A ∩ {τ ≤ t} ∈ Ft ∀t ≥ 0}.
(a) Let τ and σ be stopping times. Show that the sets {τ < σ}, {τ = σ} and {τ ≤ σ} are
elements of Fτ , Fσ and Fτ∧σ respectively.
(b) Let σ be a stopping time such that τ ≥ σ and τ is Fσ-measurable, then τ is a stopping
time.
5. Let (Wt) be a Brownian motion.
(a) Using Itoˆ’s formula find ⟨W 2⟩t and ⟨W, eW ⟩t.
(b) Let f(x) = |x| ∧M for some M > 1. Show that f is a difference of two convex functions
and compute its left derivative and second distributional derivative.
(c) Let Xt = f (exp(Wt)) (where f : R → R is given in (b)). Using Itoˆ-Tanaka formula find
semimartingales decomposition of X
6. Question 33 in MRLN.