Monday, April 3, 2017

stochastic processes - Variance of time integral of squared Brownian motion


I want to calculate the variance of


$$I = \int_0^t W_s^2 ds$$


I was thinking I could define the function $f(t,W_t) = tW_t^2$ and then apply Ito's lemma so I get



$$f(t,W_t)-f(0,0) = \int_0^t \frac{\partial f}{\partial t}(s,W_s)ds + \int_0^t \frac{\partial f}{\partial x}(s,W_s)dW_s+ \frac{1}{2}\int_0^t \frac{\partial^2 f}{\partial x^2}(s,W_s)ds \\= I + \int_0^t 2sW_sdW_s + \frac{t^2}{2}$$


By rearranging I get


$$I = tW_t^2 - \int_0^t 2sW_sdW_s - \frac{t^2}{2}$$


We then get that (I'm not sure here but i think the expectation is zero of any integral w.r.t BM?)


$$\mathbf{E}[I]=\frac{t^2}{2}$$


And variance


$$\mathbf{V}[I] = \mathbf{V}[tW_t^2 - \int_0^t 2sW_sdW_s - \frac{t^2}{2}] = t^2\mathbf{V}[W_t^2]+\mathbf{E}[(\int_0^t 2sW_sdW_s)^2] \\= 2t^4 + \mathbf{E}[\int_0^t 4s^2W_s^2ds]\quad\text{(Isometry property)}$$


Not sure if it is OK to change order of integration and expectation here, but if I do that, I get


$\mathbf{V}[I]= 2t^4 + \int_0^t 4s^2\mathbf{E}[W_s^2]ds = 2t^4 + \int_0^t 4s^2\mathbf{E}[W_s^2]ds = 2t^4 + \int_0^t 4s^3ds=3t^4$


However, the answer says the variance should be $\frac{t^4}{3}$, so I guess I do something wrong?




Answer



Other Way


By application of Ito's lemma , we have $$W^4_t=4\int_{0}^{t}W^3_tdW_s+6\int_{0}^{t}W^2_tds\tag 1$$ We know



$$\left\{ \begin{align} &\mathbb{E}\left[ {{W}^{2n+1}}(t) \right]=0\,\,\,\,\,\,\,\,\,\,\,\,\,\, \\ & \quad \mathbb{E}\left[ {{W}^{2n}}(t) \right]=\frac{(2n)!}{{{2}^{n}}n\,!}\,{{t}^{n}} \\ \end{align} \right.$$



therefore $$\text{Var}(W^4_t)=\mathbb{E}[W^8_t]-\mathbb{E}[W^4_t]^2=105t^4-(3t^2)^2=96t^4\tag 2$$ By application of Ito's Isometry, we have $$\text{Var}\left(4\int_{0}^{t}W^3_tdW_s\right)=16\int_{0}^{t}\mathbb{E}[W^6_s]ds=240\int_{0}^{t}s^3ds=60t^4\tag 3$$ on the other hand $$2\text{Cov}\left(4\int_{0}^{t}W^3_tdW_s\,,\,6\int_{0}^{t}W^2_tds\right)=24t^4\quad\text{(Why?)}\tag 4$$ Moreover $$\text{Var}(W^4_t)=\text{Var}\left(4\int_{0}^{t}W^3_tdW_s+6\int_{0}^{t}W^2_tds\right)\tag 5$$ thus $$96t^4=60t^4+36\text{Var}\left(\int_{0}^{t}W^2_tds\right)+24t^4$$ i.e $$\text{Var}\left(\int_{0}^{t}W^2_tds\right)=\frac{1}{3}t^4$$


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