Truncated Variation, Upward Truncated Variation and Downward Truncated Variation of Brownian Motion with Drift - their Characteristics and Applications
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, $W_t = B_t + \mu t, t\geq 0,$ 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.
|Date of creation:||Dec 2009|
|Date of revision:||Dec 2011|
|Publication status:||Published in (2011) Stochastic Process. Appl. 121, 378--393|
|Contact details of provider:|| Web page: http://arxiv.org/|
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- Olympia Hadjiliadis & Jan Vecer, 2006. "Drawdowns preceding rallies in the Brownian motion model," Quantitative Finance, Taylor & Francis Journals, vol. 6(5), pages 403-409.
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