First-passage time density for a level x above zero
Question
A standard Wiener process starts at . Let be the first time it reaches the level . Find the probability density of and its expected value.
Short answer
for , and . The reflection principle gives ; differentiating in yields the density. The level is hit with probability , but the density decays only like , so the mean is infinite.
Adapted from Zhou, A Practical Guide to Quantitative Finance Interviews, sec. 5.4 Brownian Motion and Stochastic Calculus, 'Stopping time B', p.131; question and answer rewritten by SelfMadeQuant.com.
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Open the worked solutionLessons behind this question
- The Reflection Principle and the Ballot Problem
- Expectation, Mean, and Variance
- Conditional Expectation and Variance Revisited
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