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Stochastic Differential
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83
84 CHAPTER 8. STOCHASTIC DIFFERENTIAL EQUATIONS
Note that for each given t, W(t) is a random variable. Its expectation is E[W(t)] = 0,
and variance
2
(Bt+t Bt ) t
E = . (8.7)
(t)2 (t)2
However,
Bt+t Bt Bt +t Bt
dt E
t t
Bt Bt
= dt E = 1. (8.8)
(t)2
E[W(t)W(s)] = 0, if t = s,
E[W(t)W(t)] = ,
E[W(t)W(s)]ds = 1.
Therefore we denote
Even though W(t) does not exist according to rigorous mathematics, it is called white
noise by physicists since a realization of W(t), say w(t), has a correlation function
satises
1 T
w( )w( + t)d = (t). (8.10)
T 0
Hence, its Fourier transform
w () = w(t)eit dt, (8.11)
Note that in rigorous mathematical term, the stochastic process W(t) does not exist
since Brownian motion B(t) is not differentiable. Hence, a more rigorous mathemati-
cal way to write the above equation is in its differential form
We can treat W(t) = dBt /dt as a regular function of time. Then for each realization
of the Bt , we have the solution to a linear ordinary differential equation with inhomo-
geneous term. By the method of variation of parameter, we have
t
X(t) = X0 et + e(tt ) dBt (8.15)
0
t t
V ar[X(t)] = e(tt ) e(tt ) E[W(t )W(t )]dt dt
0 0
t t
1 e2t
= e(tt ) e(tt ) (t t )dt dt =
0 0 2
X(t) is called an Ornstein-Uhlenbeck (OU) process.
1 e2t
g(t) = . (8.16)
2
where, for easier writting below, B( ) is the same as the B in the previous section,
the standard Brownian motion. Naively, the integral can be understood as the partial
sum
n
Sn = G(i ) [B(ti ) B(ti1 )] , (8.18)
i=1
in which
t0 t1 = t0 + t0 t2 = t1 + t1 tn1 tn = tn1 + tn1 ,
and intermediate points i [ti1 , ti ].
Deterministic G( ) . In this case, the sum in Eq. (8.18) is a sum of many in-
dependent Gaussian randon variables. It is therefore a Gaussian random variable. Its
expected value
t t
E G( )dB( ) = G( )E [dB( )] = 0. (8.19)
t0 0
2
t t t
E G( )dB( ) = G2 ( )E (dB )2 = G2 ( )d. (8.20)
t0 0 0
n
1 2 1 n
B(ti1 ) [B(ti ) B(ti1 )] = B (t) B2 (t0 ) [B(ti ) B(ti1 )]2
i=1
2 2 n=1
1 2 t t0
B (t) B2 (t0 )
ms
.
2 2
n
ms lim [B(ti ) B(ti1 )]2 = t t0 . (8.24)
n
i=1
First we see that the expected values of the left-hand-side is indeed the right-hand-side.
Furthermore,
2
n
n
E [B(ti ) B(ti1 )]2 (t t0 ) = V ar [B(ti ) B(ti1 )]2
i=1 i=1
n
= V ar[B(ti ) B(ti1 )]2
i=1
n
(ti ti1 )2 0.
n
= 3
i=1
2
In the derivation we used the fact E[B4t ] = 3 E[B2t ] = 3t2 .
In general, we have
2
ms lim dBt = dt, (8.25)
t0
and furthermore,
ms lim dB2+n
t = o (dt) , n 0. (8.26)
t0
The most important aspect of Ito integration is, as shown in Eqs. (8.29) and (8.30), that
both integrals are completely determined, statistically, by X(t0 ). Therefore, X(t), as a
solution to the SDE (8.27), is Markovian.
The rst kind is really a regular sum of random variables. The second kind is new. The
impotance of the Itos convension, i.e., the function G being nonanticipating, is that
it guarantees that the function of random variable X(s), G(X(s), s) is independent of
the dB(t). Therefore,
t
E G(X(s), s)dB(s) = 0, always. (8.32)
t0
This means that, by Ito convention, the integral on the right of Eq. (8.31) has a constant
zero mean for all t. This property is known as martingal.
8.4. PARTIAL DIFFERENTIAL EQUATIONS ASSOCAITED WITH SDE 89
1
dY(t) = x (X(t))dX(t) + t (X(t))dt + xx (X(t))[dX(t)]2
2
1
+xt (X(t))dXdt + tt (X(t))(dt)2 + ... (8.33)
2
(abbreviating x = /x, t = /t, etc.) Note that dX(t) does not have a
classical meaning, it has to understood by according to the Ito calculus (see below).
For example,
a2
deaB(t) = aeaB(t) dB(t) + eaB(t) dt. (8.34)
2
1
d(Xt )) = x (Xt )dXt + xx (Xt )(dXt )2
2
1
= x (Xt )b(Xt )dt + x (Xt )A(Xt )dBt + xx (Xt )A2 (Xt )dt
2
for arbitrary function (x). Hence, we take the expection for both sides using pdf
f (x, t) and dividing bt dt, we have
d 1
dxf (x, t)(x) = dxf (x, t) x (x)b(x) + xx (x)A2 (x) . (8.35)
dt 2
1 2 2
f (x, t) = A (x)f (x, t) b(x)f (x, t). (8.36)
t 2 x2 x
This is the Kolmogoriv forward equation, with A2 (x) = a(x).
Note that in the derivation of Eq. (8.35), we have used the fact
This is based on the Ito convention: That x (Xt )A(Xt ) is nonanticipating, since Xt
is independent of dBt .
90 CHAPTER 8. STOCHASTIC DIFFERENTIAL EQUATIONS
A2 (x) 2
Lx [u] u(x) + b(x) u(x). (8.39)
2 x2 x
We see that on the left-hand-side
f (x, t + |z) = f (x, t + |z),
t
and on the right-hand-side, in the limit of 0, f (y, |z) = (y z), we have
f (x, t|z) = Lz f (x, t|z). (8.40)
t
This is the Kolmogorov backward equation.
where the superscript y in E y [] indicates that the expectation is taken with the all the
X(t) with initial condition X(0) = y.
It is also intuitively obvious that the fX (x, t|y) should satisfy the differntial equa-
tion
f (x, t|y) = Lx [fX ] q(x)fX . (8.42)
t X
8.4. PARTIAL DIFFERENTIAL EQUATIONS ASSOCAITED WITH SDE 91
A2 (X(t))
= E y
(x X(t))q(X(t)) (x X(t))b(X(t)) + (x X(t))
2
t
e 0 q(X(s))ds
2 A2 (x)
= q(x)fX (x, t|y) b(x)fX (x, t|y) + f (x, t|y)
x x2 2 X
satises the same Eq. (8.43). This relation between the diffusion with killing, X(t),
and Eq. (8.43) is called the Feymann-Kac formula.
We can obtained similar result for
t
(x, t|y) = E y (x X(t))e 0 g(X(s))dBs , (8.45)
t
which involves the Ito integration 0 g(X(s))dBs . Using the same method, one can
show the Cameron-Martin-Girsanov formula
2
= Lx (x, t|y) + (A(x)g(x)) + g 2 (x). (8.46)
t x 2
92 CHAPTER 8. STOCHASTIC DIFFERENTIAL EQUATIONS
u 1 u
u = , , (8.59a)
r r
1 (rvr ) 1 v
v = + , (8.59b)
r r
r
1 u 1 2u
2 u = r + 2 2. (8.59c)
r r r r
Then the corresponding linear PDE in the polar coordinate is
f(r, , t) 2 1 f 1 2 f
= r + 2 2 , (8.60)
t 2 r r r r
in which f(r, , t) = fxy (r cos , r sin , t). In term of the probability density function
fr (r, , t) = rf(r, , t), we have
2
fr (r, , t) 2 2 fr 1 2 fr d 2 ln r
= + 2 fr . (8.61)
t 2 r2 r 2 r dr
We see there is a noise-induced force pusing the diffusion toward greater r with
2
potential function 2 ln r! This force is a pure probabilistic effect due to geometry:
The probability in a two dimensional area element fxy (x, y)dxdy, when expressed
in the polar coordinate, becomes f(r, )rdrd = fr, (r, )drd that accounts for the
greater area, thus probability, between [r, r + dr] with equal d.
We now do things a little differently. We consider a Cartesian to polar transforma-
tion, given in Eq. 8.58, for the SDE in (8.56) following Itos calculus. We note
xdx + ydy y 2 (dx)2 2xy(dx)(dy) + x2 (dy)2
dr = + ,
r 2r3
(8.62)
ydx + xdy xy(dx)2 + (y 2 x2 )(dx)(dy) + xy(dy)2
d = + .
r2 r4
94 CHAPTER 8. STOCHASTIC DIFFERENTIAL EQUATIONS
Therefore, the simple stochastic harmonic oscillator with the polar coordinates, accord-
ing to Itos convention, is
2
dr = dt + cos dB1 (t) + sin dB2 (t) ,
2r
(8.63)
d = sin dB1 (t) + cos dB2 (t) .
r
Let us denote the matrix in (8.68) ,
cos sin
(r, ) = . (8.64)
1r sin 1r cos
Then T is a diagonal matrix. Note that in Ito PDE, the matrix T appears as
2
fr (r, , t) 2 2 T
= fr fr
t 2 r 2r
,=r,
2 2 fr 2 2 fr 2 fr
= + . (8.65)
2 r2 2r2 2 2 r r
As a consistency check, we see that Eqs. (8.65) and (8.61) are the same.
We note that in Eq. (8.68), according to Ito calculus:
2 2
E dBr (t) = E dB (t) = 0, E dBr (t) = E dB (t) = dt, (8.66a)
and
E dBr (t)dB (t) = 0. (8.66b)
Therefore, Eq. (8.68) can be simplied into
2
dr = dt + dBr (t), d = dB (t). (8.67)
2r r
However, for Stratonovich integration, the equations in (8.66) are not valid. The
Stratonovich SDE is
dr = cos dB1 (t) + sin dB2 (t) ,
(8.68)
d = sin dB1 (t) + cos dB2 (t) ,
r
and the corresponding linear PDE
fr (r, , t) 2
= (r, ) (r, ) fr (r, , t)
t 2
,,=r,
2
fr
= T + fr,
2
,=r, =r,
2 2 fr 1 2 fr fr
= 2
+ 2 . (8.69)
2 r r 2 r r
8.5. NON-ITO INTEGRATION 95
Again, we see this equation is the same as Eqs. (8.65) and (8.61).