Explain the important properties of Brownian motion

Explain the important properties of Brownian motion.




The significant properties of BM are as given here:

  • Finiteness: the scaling of the variance along with the time step is crucial to Brownian motion remaining finite.
  • Continuity: the ways are continuous, there are no discontinuities. Nonetheless, the path is fractal, and not any differentiable anywhere.
  • Markov: the conditional distribution of Wt specified information up till τ< t depends only upon Wτ.
  • Martingale: It given information up till τ< t the conditional expectation of Wt is Wτ.
  • Quadratic variation: When we divide up the time 0 to t within a partition along with n + 1 partition points ti = i.t/n after that

796_Quadratic variation.png

  • Normality: Over finite time increments as ti-1 to ti, Wti -Wti-1 that is normally distributed along with mean zero and variance ti - ti-1.

You'll notice this 'W' in the form dW like the stochastic increment term in stochastic differential equations. This might also appear as dB or dX, various authors using various letters, and sometimes with a time subscript. Although these are all similar thing!

It's frequently easiest just to think of dW as being a random number drawn by a normal distribution along with the properties:

E[dW] = 0 and E[dW2] = dt.

   Related Questions in Financial Management

2015 ©TutorsGlobe All rights reserved. TutorsGlobe Rated 4.8/5 based on 34139 reviews.