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Correlation of Brownian motion with its own square

Question

For a standard Brownian motion BB and fixed t>0t>0, what is the correlation between BtB_t and Bt2B_t^2?

Short answer

00. Cov⁡(Bt,Bt2)=E[Bt3]−E[Bt]E[Bt2]=0\operatorname{Cov}(B_t,B_t^2)=\mathbb{E}[B_t^3]-\mathbb{E}[B_t]\mathbb{E}[B_t^2]=0, since odd moments of a centred normal vanish. They are uncorrelated even though Bt2B_t^2 is a function of BtB_t, a standard example that zero correlation does not imply independence.

Adapted from Zhou, A Practical Guide to Quantitative Finance Interviews, sec. 5.4 Brownian Motion and Stochastic Calculus, 'Brownian motion B', p.129; question and answer rewritten by SelfMadeQuant.com.

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