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A correction note on the first passage time of an Ornstein-Uhlenbeck process to a boundary

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Author Info

  • O. Renault

    ()
    (Département des Sciences Economiques, Université Catholique de Louvain, 3 Place Montesquieu, B-1348 Louvain-la-Neuve, Belgique)

  • O. Scaillet

    ()
    (Département des Sciences Economiques, Université Catholique de Louvain, 3 Place Montesquieu, B-1348 Louvain-la-Neuve, Belgique)

  • B. Leblanc

    ()
    (Banque Nationale de Paris, BFI-MC, 13, rue Lafayette, F-75009 Paris, France)

Abstract

This paper provides the derivation of the hitting time density of an Ornstein-Uhlenbeck process to a flat boundary. The derivation relies on a change of measure approach and delivers an explicit formula. This formula is an amended expression of the result given in Leblanc and Scaillet (1998). It corresponds to the formula given by a time substitution approach when the boundary level coincides with the mean of the invariant measure. It can for example be used to price digital up-and-in credit spread options when the logarithm of the credit spread is assumed to follow an Ornstein-Uhlenbeck process.

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Bibliographic Info

Article provided by Springer in its journal Finance and Stochastics.

Volume (Year): 4 (2000)
Issue (Month): 1 ()
Pages: 109-111

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Handle: RePEc:spr:finsto:v:4:y:2000:i:1:p:109-111

Note: received: February 1999; final version received: April 1999
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Related research

Keywords: Hitting time; Ornstein-Uhlenbeck process; path dependent option;

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Cited by:
  1. Hidetoshi Nakagawa & Tomoaki Shouda, 2004. "Analyses of Mortgage-Backed Securities Based on Unobservable Prepayment Cost Processes," Asia-Pacific Financial Markets, Springer, vol. 11(3), pages 233-266, September.

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