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Brownian motion positive at time 1 then negative at 2

Question

A standard Brownian motion XX starts at X0=0X_0=0. Given that X1>0X_1>0, what is the probability that X2<0X_2<0?

Short answer

1/41/4. X1X_1 and X2X_2 are jointly normal with correlation 1/21/\sqrt2, so P[X1>0,X2<0]=14−arcsin⁡(1/2)2π=14−18=18\mathbb{P}[X_1>0,X_2<0]=\tfrac14-\tfrac{\arcsin(1/\sqrt2)}{2\pi}=\tfrac14-\tfrac18=\tfrac18. Dividing by P[X1>0]=12\mathbb{P}[X_1>0]=\tfrac12 gives 14\tfrac14. Geometrically, the increment must exceed X1X_1 in magnitude, a 45∘45^\circ wedge out of the 180∘180^\circ half-plane.

Adapted from Joshi, Denson & Downes, Quant Job Interview Questions and Answers, Q3.51, p.85; question and answer rewritten by SelfMadeQuant.com.

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